Saturday, December 26, 2009, 11:14PM ET - U.S. Markets Closed.

"Precarious State": Stocks Fairly Valued But "Could Go Down a Lot," Shiller Says

Posted Jul 10, 2009 01:23pm EDT by Aaron Task in Investing, Newsmakers
Barring a major late-day rally, this week will mark the fourth-straight down week for the stock market following its explosive rally off the March lows.

After all the drama of the past few months, the stock market is now fairly valued on a long-term cyclically adjusted P/E basis, says Robert Shiller, Yale economics professor and author of, most recently, Animal Spirits (with George Akerlof).

That neutral valuation suggests the stock market is likely to resort to its long-term average of 7% annual gains, Shiller says. That sounds great, but the famed professor isn't forecasting that outcome due to one major caveat: The economy is in a "precarious state" and, should it stumble anew, the stock market "could go down a lot," he says.

Shiller is clearly dubious of the "green shoots" mentality and believes it will take a very long time for the economy to return to normal growth after the bursting of the housing and credit bubbles.

"Yes," the professor says without hesitation, when asked if there's a risk the U.S. could suffer the same kind prolonged economic malaise as Japan has endured since the early 1990s.

The silver lining here is Japan's current experience isn't so bad relative to the Great Depression of the 1930s, Shiller notes. Furthermore, he believes smart diversification - vs. "slavishly following" some statistical model - can provide investors a "true way to safety and the ability to capture upside" in various asset classes. 

164 Comments

shirazif
shirazif - Friday July 10, 2009 01:36PM EDT

They WILL go lower. Like in the Great Depression, we'll have a see-saw ride DOWN.

yogi9448
yogi9448 - Friday July 10, 2009 01:43PM EDT

Still loving those Bear ETFs......I vaguely remember "experts" calling each new low channel from 09 2008 through 4 2009 fairly valued...With the current market still undergoing earnings evaluation, hidden toxic assets, product demand flucuations, personnel debt increasing/later payments, housing woes, private sector job losses and the Feds/Media constantly changing which business sector/CEO to character assassinate next....How can anyone predict fair market value....Go with what the market trend tells you, it's telling me that to about the end of August markets looking down.

BobDiaz
BobDiaz - Friday July 10, 2009 01:44PM EDT

Don't worry, if you think things are bad now, President Obama will make it worse!!!!!

Yahoo! Finance User
Yahoo! Finance User - Friday July 10, 2009 01:45PM EDT

Fight the good fight.....Finish the race....Keep the faith... Circumstances are the rulers of the weak, instruments of the wise. Good Luck!

__A_YAHOO_USER__
__A_YAHOO_USER__ - Friday July 10, 2009 01:50PM EDT

October crash coming.......

WolfTalk101
WolfTalk101 - Friday July 10, 2009 01:52PM EDT

The horizon is stormy people have no doubt bad times are still coming. But I do agree stocks are cheap if you can hold them for a decade. Maybe longer if Obama gets re-elected. Don’t forget “Democracy is only the tyranny of the majority.” Just hope your not in the minority.

David
David - Friday July 10, 2009 01:57PM EDT

Well, Scottrade, what is the smell of losses in the morning? I hope you have a better way of assessing what matters in life than your nose!

Yahoo! Finance User
Yahoo! Finance User - Friday July 10, 2009 02:03PM EDT

Believe in miracles! This is our only life and we will never be able to repeat it,.... cherish and live each day of our fully with delight!

G Judson F
G Judson F - Friday July 10, 2009 02:04PM EDT

we are headed for the mother of all roller coaster rides in the stock market.

tom c
tom c - Friday July 10, 2009 02:08PM EDT

Shiller reminds me of Marty Feldman, I'm waiting for Frankenstein to to show up and sit next to him.

holy smokes
holy smokes - Friday July 10, 2009 02:13PM EDT

I don't know if this a problem or not. I just pulled a five dollar bill out to buy lunch and the danm thing said made in China. What do you think?

Fabien H
Fabien H - Friday July 10, 2009 02:16PM EDT

After all these calls about a lost decade a la Japanese, finally somebody says it; if this depression is like Japan's there will be little to complain about.

Whit Chambers
Whit Chambers - Friday July 10, 2009 02:17PM EDT

Milton Friedman once observed a South American Country had workers digging a canal using shovels and asked why not use excavators to improve “productivity”, which is key to economic growth. The government official responded that it was a Jobs bill. Milton said [sarcastically], “Well then give them all spoons instead of shovels.” Obama’s stimulus is full of spoons.

Yahoo! Finance User
Yahoo! Finance User - Friday July 10, 2009 02:18PM EDT

Oil getting sold off, would be down lower but China is bashing the dollar at the moment. If China actually comes out with concrete steps to disengage from the dollar, then say buh bye to America. Stocks are not valued properly. Future earnings can't be predicted with any accuracy. In fact, we know the stimulus package is not working. New hires are declining just as job losses are leveling off. Means not even a "jobless recovery". Market will test new lows in Sept. Don't buy gold, buy food and ammo.

Yahoo! Finance User
Yahoo! Finance User - Friday July 10, 2009 02:19PM EDT

What drives tom's dream? Get smart gear up! Your wish will be granted!

Robert
Robert - Friday July 10, 2009 02:19PM EDT

I believe that the average American has way too much of his/her IRA invested in stocks. That is because all the major brokerage houses and mutual fund companies have models that advise that. One can better secure their retirement with Inflation Protected Securities and AAA Bonds. By giving up a "probable" 2 points one can cut the risk immensely. Only the stockbrokers lose.

Yahoo! Finance User
Yahoo! Finance User - Friday July 10, 2009 02:19PM EDT

I think it's going in Sept. this time.

Yahoo! Finance User
Yahoo! Finance User - Friday July 10, 2009 02:24PM EDT

I think it will be impressed.....A happy Get-together!

Whit Chambers
Whit Chambers - Friday July 10, 2009 02:24PM EDT

Timothy Geithner said Derivatives blindsided the government. Well apparently, he was also blindsided by the bloated housing market having purchased a 1.7 million dollar home he couldn’t afford. He has a personal net worth of nada…bankrupt. So the Obama and his vetting team put him in charge of the Treasury. Now their new slogan is “confidence”. Almost comical if it weren’t scary.

Robert
Robert - Friday July 10, 2009 02:30PM EDT

Dont worry who does not like gambling, there always be peoplet invest ing in the market no matter what.

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