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Shiller: Stocks Not Yet Cheap Enough for Me
Posted Feb 23, 2009 08:00am EST by Henry BlodgetYale professor Robert J. Shiller, the author of "Irrational Exuberance," created one of the most useful and predictive measures of stock-market valuation: the cyclically-adjusted price-earnings ratio (CAPE).
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
(Why is this important? Because profit margins are mean-reverting. In boom times, companies have high profit margins and big earnings. In busts, profit margins collapse and companies have small earnings. Taking a single-year P/E ratio can therefore provide a misleading picture of value: In booms, with high profit margins, stocks look cheaper than they really are. In busts, with low margins, stocks look more expensive than they are.)
As you can see in the attached chart, Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The S&P 500 is down significantly since this chart was created, moreover, so the market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past. That could happen either through an additional severe drop or a long period in which the market moves sideways and earnings grow again.
See also from The Business Insider: Stocks Now Distinctly Cheap
193 Comments
AmolJ - Monday February 23, 2009 08:13AM EST
Can these "experts" stop talking of doom and gloom? By instilling more fear, it is exacerbating what already is a bad situation. Whilst this gentleman has the credentials to be the expert, Tech Ticker recently has invited least convincing clowns to the forum - whose collective wisdom (or lack thereof) got us in here in the first place. They were wrong before the crisis ensued. Now, everyone is jumping up and down to be "right" this time around.
timb - Monday February 23, 2009 08:31AM EST
Hold on to your wallet. Obama is reaching in it. Pity our poor children and granchildren who will have to pay eventually for all this debt. Timothy Bauer Reno, Nevada
gus - Monday February 23, 2009 08:35AM EST
AmolJ - Shiller called the stock and RE bubbles well before many in the main stream media did. If you followed his advice, you would have made a lot of money. He's not doom and gloom - he's realistic. You're angry at the wrong people.
gus - Monday February 23, 2009 08:35AM EST
AmolJ - Shiller called the stock and RE bubbles well before many in the main stream media did. If you followed his advice, you would have made a lot of money. He's not doom and gloom - he's realistic. You're angry at the wrong people.
Boubou - Monday February 23, 2009 08:42AM EST
This is a very credible view. Stocks ARE too high, despite cnbc and fox-heads talking up 'the buying opportunity of the century'
Yahoo! Finance User - Monday February 23, 2009 08:55AM EST
I agree. I’m going wait for the DOW to fall another thousand points, maybe two. I think that’s when the REAL bargains will start to appear.
Yahoo! Finance User - Monday February 23, 2009 08:58AM EST
Yep. Stocks are too high for me too. Too old to chance it. I'd probably buy back in at Dow 4000 though.
Yahoo! Finance User - Monday February 23, 2009 09:03AM EST
professor, i see the dow jones a 6.500 puntos
Yahoo! Finance User - Monday February 23, 2009 09:05AM EST
I wish people would capitulate already. Most of the people I know rode it down. There's millions like them. Capitulation is not here yet.
Anthony - Monday February 23, 2009 09:06AM EST
Henry Bloget didn't get it right the last time he was in a downturn... what makes him an expert now. He was one of the brokers of irrationality. Sorry Henry. Get a job
Mike - Monday February 23, 2009 09:07AM EST
The bargains exists if you believe that the market will continue to support the high P/E ratios of the "Dow 14,000" days. If you believe the market will return to that then there is a bargain every day! I will have to say, we are closer to the bottom now than we were last year. THE GREAT RECESSION IS HERE!!!
Golfifun - Monday February 23, 2009 09:08AM EST
Hope this guy gets screwed along with all of the other financial genuises out there
Yahoo! Finance User - Monday February 23, 2009 09:08AM EST
I agree with Amol ... these doom and gloom people are partly to blame for the severity of the downturn just as much as the hyper DOW 40000 people are to blame for the irrational exuberance during the up years. It is easy to be an expert when markets are cyclical, because of their very nature, about half the time you will be right!!!
Bulleye168 - Monday February 23, 2009 09:12AM EST
I FULLy agreed with professor Shiller housing prices got another 20-40% to fall. Alt-A & Option-Arm resets has started soaring from 2009 till 2011, just do a google on "Alt-A resets" or "Option Arm resets", you'll see lots of stats of Alt-A & Option-Arm resets. Its no brainer... I read that jumbo loans delinquency has deteriorated rapidly. ( http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ab4hyMC6aJf0 ) Don't hope, face reality
Bulleye168 - Monday February 23, 2009 09:12AM EST
I FULLy agreed with professor Shiller housing prices got another 20-40% to fall. Alt-A & Option-Arm resets has started soaring from 2009 till 2011, just do a google on "Alt-A resets" or "Option Arm resets", you'll see lots of stats of Alt-A & Option-Arm resets. Its no brainer... I read that jumbo loans delinquency has deteriorated rapidly. ( http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ab4hyMC6aJf0 ) Don't hope, face reality
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AmolJ - Monday February 23, 2009 08:09AM EST
Can these "experts" stop talking of doom and gloom? By instilling more fear, it is exacerbating what already is a bad situation. Whilst this gentleman has the credentials to be the expert, Tech Ticker recently has invited least convincing clowns to the forum - whose collective wisdom (or lack thereof) got us in here in the first place. They were wrong before the crisis ensued. Now, everyone is jumping up and down to be "right" this time around.