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Current Market Boom "Can't Be Trusted," Robert Shiller Says

Posted Oct 19, 2009 12:30pm EDT by Peter Gorenstein in Investing, Newsmakers, Housing
Related: ^dji, ^gspc, dia, spy, qqqq, XHB

Are we on track for a repeat of irrational exuberance?

With the stock market up more than 50% since March and the Standard & Poor's Case/Shiller Index on the rise for the last three months, it's a worry, says Yale Professor Robert Shiller. "Somehow we got into this really speculative mentality and I don't think we're out of it yet."

Given the current economic environment, "these booms [in the housing and stock markets] that we're seeing now can't be trusted to continue," Shiller tells Tech Ticker in the accompanying video, taped at last week's Buttonwood Gathering. (Click here for part one of the interview.)

The author of Irrational Exuberance and Animal Spirits characterizes the stock market rally as an "amazing rebound" without much historic precedence, "you have to go back to the Great Depression to see such a turnaround in the stock market."

According to his cyclically adjusted P/E valuation model - stock price divided by average 10-year earnings - stocks are overvalued today, but "not massively overvalued." 

The market's rebound isn't likely to be derailed by valuation in the short term, Shiller says, but if one looks to the classic bear market rally of 1933-1937 as a guide, stocks may eventually crater as they did then.

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