Daily Ticker

Shiller: CAPE ratio is high but you should still own stocks


Stocks started Monday in positive territory after taking a break from the selling last week when the Dow (^DJI) and Nasdaq (^IXIC) both rose 2.4%, posting their biggest weekly gains since December and November, respectively. The S&P 500 (^GSPC) meanwhile rose 2.7%, its biggest weekly gain since last July. And indexes tracking sectors that have been hard-hit recently including biotech and Internet stocks climbed more than 3%.

Related: Emotionally driven selloff leaves scars

So what's next?

Some market watchers have pointed to Yale professor and Nobel Prize winner Robert Shlller's cyclically-adjusted price/earnings ratio, or CAPE, to raise concerns that stocks are expensive. The Daily Ticker's Henry Blodget has used this datapoint in his argument that we're likely to have lousy returns for the next seven to 10 years or possibly a severe pullback shorter term (he points out that valuation measures are a terrible timing tool). 

Related: Stocks could plunge 50% in the next year or two: Blodget

In the accompanying video, Shiller tells us that the "CAPE index is rather high," but adds that this ratio first achieved public prominence when he and his colleague presented it to the Federal Reserve board in 1996. He says CAPE was kind of high then too, but then it kept going up for almost three more years.

Currently, the CAPE ratio for the S&P 500 is about 25, versus the average of about 16.

Shiller's takeaway? "Even though it's high, I still think stocks ought to be part of someone's portfolio ... We're just not living in the best of times. 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 diversify and probably keep something in stocks."

Related: Momentum may be changing in the housing market: Robert Shiller

Check out the accompanying video to see why he is wary of the hype surrounding tech stocks, and if he thinks the market is rigged due to the advantages exploited by high-frequency traders as Michael Lewis posits in his new book Flash Boys.

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