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Tags: Robert Shiller | stocks | risk | declines

Yale's Robert Shiller: Stocks Face 'Risk of Substantial Declines'

Yale's Robert Shiller: Stocks Face 'Risk of Substantial Declines'
Robert Shiller

By    |   Friday, 04 September 2015 11:28 AM EDT

Even after last week's plunge, Robert Shiller's cyclically-adjusted price-earnings ratio for the S&P 500 index, which accounts for 10 years of earnings, still stands at 24.9. That's not far from its recent high, which trailed only the pre-crash periods of 1929, 2000 and 2007.

"It's a risky time," the Nobel laureate economist told CNBC.

"There's a risk of substantial declines. One shouldn't overreact, but the market is high now," said Shiller, of Yale University.

The CAPE ratio has averaged 16.6 since 1881, and a return to that level would put the S&P 500 at 1,300. That would represent a 34 percent drop from 1,962 Thursday afternoon.

The index hit a record high of 2,134.72 May 20 and touched a low of 1,867.01 Aug. 24.

To be sure, there have been sustained periods when the CAPE ratio stayed above historical norms, Shiller says. "Nobody can really forecast the market accurately. But I think this is a risky time." He said he has reduced his own stock weighting.

But investors have different goals and risk tolerance levels. "People need to look at their own risk situation," Shiller said.

Elsewhere on the investment front, it might seem counterintuitive, but residential real estate stands as a strong hedge against drops in the stock market, notes columnist Mark Hulbert in Barron's.

"In 14 of the 15 previous U.S. equity bear markets, going back to 1956, the home-price index rose," he writes. "And in that lone bear market prior to 2007 in which home prices did fall, they did so by just 0.4 percent."

Of course, the home price decline during the 2007-2009 bear market for stocks represents a marked exception.

The key question for investors, then, is whether that home price drop was an aberration. Hulbert asked that question to Shiller, who's also a housing expert.

“To some extent, it must be," the Yale professor said. "Overall there just isn’t much correlation of home prices with the stock market. So it [what happened in 2007-2009] looks like just chance.”

It's not easy to invest directly in home prices. You can buy the stocks of homebuyers or buy apartment REITs.

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StreetTalk
Even after last week's plunge, Robert Shiller's cyclically-adjusted price-earnings ratio for the S P 500 index, which accounts for 10 years of earnings, still stands at 24.9.
Robert Shiller, stocks, risk, declines
375
2015-28-04
Friday, 04 September 2015 11:28 AM
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