The conventional wisdom is that it is never possible to “time the market.”
But, in a new commentary for Project Syndicate, economist Robert Shiller explains why major shifts — like the quadrupling of the U.S. stock market over the last decade — should be at least partly foreseeable.
“Should we have known in March 2009 that the United States’ S&P 500 stock index would quadruple in value in the next 10 years, or that Japan’s Nikkei 225 would triple, followed closely by Hong Kong’s Hang Seng index?” Shiller, a 2013 winner of the Nobel Memorial Prize in economics and professor of economics at Yale University, writes.
Yet, these moves aren’t predictable. Why? Shiller explains that “no one can prove why a boom happened, even after the fact, let alone show how it could have been predicted.”
The economist uses the U.S. boom since 2009 as a case in point.
In the fourth quarter of 2008, S&P 500 earnings per share had been negative — which Shiller says was “a very rare event” — both for reported earnings and for operating earnings. Those numbers were just coming in around March 2009, when Shiller says “the index reached its nadir.”
“You might think that an intelligent observer in the U.S. in 2009 would have recognized that the decline was temporary, and would have expected earnings — which are relevant to forecasting long-term growth of stock prices — to recover,” Shiller writes. “But the real question is whether the observer could have based a very optimistic forecast for long-term earnings growth on the rebound from that negative earnings moment.”
Long-term measures of earnings growth did not change a lot: 10-year average S&P 500 earnings per share from 2009 to 2019 were up only 71% from the previous decade, according to Shiller.
“The quadrupling in the S&P 500 price index was thus driven not by higher earnings but by much higher valuations of earnings,” Shiller explains.
According to Shiller, the quadrupling of U.S. stock prices since 2009, as well as Donald Trump’s election to the presidency, reflects a process of fear abatement and re-enchantment with American business culture.
However, he adds that it is hard to forecast such trends — even the biggest — in the stock market. This is “not only because forecasting is a highly competitive business, but also because spontaneity plays such an important role in human behavior,” Shiller explains.
In 2009, some people in the U.S. were using very strong language to express their fear.
For instance, according to ProQuest News & Newspapers, the frequency of the phrase “Great Depression” soared to unprecedented heights. There were more mentions of “Great Depression” in 2009 than there were during the Great Depression.
According to Shiller, many people were worrying in March 2009 that stocks had a lot further to fall.
But then, with no stock-market crash and no extreme depression in sight, Shiller says that these fears were replaced with a deeper admiration of business success.
“A new narrative emerged, featuring a new wave of billionaire geniuses whose appearance in the 1990s was interrupted only briefly by the financial crisis,” Shiller writes. He adds that “The accession of a flamboyant businessman, Donald Trump, to the U.S. presidency is evidence of the strength of many Americans’ identification with business heroes.”
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