Yale economist Robert Shiller says that the market ratio he developed is “rather high,” but that investors should still hold some stocks today.
That ratio, the cyclically adjusted price-to-earnings ratio, is now at 25.28. That is way off is historic high of 44.20 in December 1999, but also way above the market’s long-term average of 15.
The CAPE index was also quite high in 1996, when Shiller testified before the Federal Reserve, and then “it kept going for almost three more years,” the Nobel Prize winner said in an interview Friday on Yahoo Finance. “Even though it’s high, I still think stocks out to be part of someone’s portfolio — maybe not as big a part” as in previous times, he explained.
Overall, the economist is sanguine about investing and returns in 2014: “We are just not living in the best of times. The momentum is weakening in housing; stocks look overpriced; bonds are paying poorly; there’s risk there, too. There’s no easy way to win in this market. So I’m thinking, you have to diversify and probably keep something in stocks.”
As for technology and recent weakness in some social media and biotech companies, he is especially concerned. “When people get really excited about an investment, I tend to go the other way … It’s a contrarian instinct.”
He explained that the Barclays Shiller CAPE ETN (CAPE) is invested in health care and energy. Recently it moved into financials and technology. “These are all sectors with low CAPE relative to past performance," he said. "I think there is a better bet.”
Discussing Michael Lewis’ latest book, “Flash Boys,” Shiller said, “It raises an important issue … for regulators to think about.”
But he also noted that Lewis is “being a little sensationalist. People should not be afraid of investing in the market.”
Shiller’s thinking is that that market has “been rigged in one sense or another from the beginning of its history. There have always been people trying to main the market or take advantage of front run.”
Data on housing starts was weaker than expected last week. But whether that portends a shift in the housing recovery “is not clear to me yet,” he says. “Home prices were down a smidgen in the last couple of months, but season adjusted, they are still up.”
However, “It’s no longer at all clear that momentum is a safe bet anymore,” Shiller stressed.
“And momentum still appears to be up,” he said. “I’m thinking home prices should probably go up but at a reduced pace. They’re nothing to get excited about.”
And while he sees not “solid evidence of a fall,” the economist recommends investors “take these risks into account.”
Finally, when it comes to putting money into real estate versus equities, he suggests investors diversify. “It’s just common sense,” Shiller explained.