Robert Shiller: Why Aren’t Stock-Market Booms Predictable?

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.