Robert Shiller, the Nobel Prize-winning economist, thinks this may be a “dangerous time” for the stock market.
In an interview Thursday on CNBC’s Squawk Box, he described how his cyclically adjusted price-to-earnings (CAPE) ratio is signaling a warning for stocks.
“The monthly CAPE ratio reached a peak of 44 in the year 2000 and that was followed by an important drop. It went down to 13, came back up to 27 in 2007 and [was] followed by another drop and then we were recently back up to 27 again,” the Yale University professor told CNBC. “It does seem to forecast somewhat – it’s not reliable – but it’s a warning signal.”
Right now the CAPE ratio is around 25. According to Shiller, “it’s high.”
If the CAPE index were to drop again – 17 has been the historical average – the DOW and S&P 500 would also fall “quite a bit lower,” Shiller says.
If this happened, Shiller predicts the Dow Jones industrial average would fall to “something like 11,000” and 1,300 on the S&P 500. On Thursday, the Dow was around 16,351, and the S&P 500 around 1,948.
That’s not to say that will happen or that stocks couldn’t also go higher from here, Shiller says.
“They could go a lot higher,” he told CNBC. “I just mentioned the CAPE got up to 44 – even higher on a daily basis. That was in 2000. Nobody can really forecast the market accurately, but I think this is a risky time. There is a risk of substantial declines, as well as [increases].”