MUST READ: Shiller on bubbles and busts
Nobody is always right. With that said, it’s only natural that we gravitate in our listening to those we have seen demonstrate a notable track record. Humans are notoriously bad at picking turning points, so we like those rare canaries that have got it right more than once. Robert Shiller is one of those guys, and what makes him especially worthy of your attention is that he hasn’t been successful by forecasting frequently.
The shotgun approach to forecasts can be made to look good. Shiller isn’t armed with a shotgun. He’s more of a sniper, and in a recent blog post on The Wall Street Journal, he was quoted on his long-term stock-pricing indicator, CAPE (Cyclically Adjusted Price/Earnings).
CAPE “has more probability of predicting actual declines or dramatic increases” when the measure is at an “extreme high or extreme low.” For instance, CAPE exceeded 32 in September 1929, right before the Great Crash, and 44 in December 1999, just before the technology bubble burst. And it sank below 7 in the summer of 1982, on the eve of a 17-year bull market.
Today’s level, Prof. Shiller argues, isn’t extreme enough to justify a strong conclusion. So, he says, he and his wife still have about 50% of their portfolio in stocks.
On Thursday, as the Dow fell more than 300 points, Prof. Shiller told me, “The market has gone up for five years now and has gotten quite high, but I’m not selling yet.” He advises investors to monitor not just the level of the market, but the “stories that people tell” about the market. If a sudden consensus about economic stagnation forms, that could be a dangerous “turning point,” he says.
Based on new research he has done into industry sectors, he says, he is “slightly overweight” in health-care and industrial stocks.
On the bond market – something many are saying is a dangerous bubble and which we note an inability to predict when rates will rise again, just that they inevitably will, Shiller observes:
“A bubble is a product of feedback from positive price changes that create a ‘new era’ ambience in which people think increasingly that prices will go up forever.”
Today’s bond market, he adds, “is just the opposite of a new-era ambience.” Instead, the demand for bonds is driven by “an underlying angst” about the slow recovery and pessimism about the future. “That’s not a bubble,” he says.
If you’re a WSJ subscriber, you can (and should) read the entire blog post here.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
