Robert Shiller Shares Insights on the Trump-Bump

In a February interview with Bloomberg, Yale University professor Robert Shiller says, “I think the Trump effect is really important.” While Shiller, winner of the Nobel Prize in Economics, says he can’t speak authoritatively on what’s ahead because that would be “guessing human psychology,” he says that the current Shiller P/E ratio (also referred to as the CAPE) of 29 is “very high” and could spell trouble. It’s not at the level it was in 1929, he says, but it’s close. Shiller recalls that the CAPE was at a similar level in 1997 and “held on for 10 years.” While […]

Shiller on Behavioral Economics

An interview with Robert J. Shiller, the recipient of the 2013 Nobel Prize in economics, was recently published in Pacific Standard magazine. The discussion centered on the advent of behavioral economics—the introduction of other social sciences into the field of economics. “It’s a revolution in economics that has taken place over the past 20 years or so. It’s bringing economics into a broader appreciation of reality,” says Shiller. While traditional economics has focused on the workings of a market based on “ideally rational” individuals, Shiller says that behavioral economics introduces the notion that we don’t always behave in our own […]

Is Shiller’s CAPE as Scary as it Seems?

In the 1990’s, economists Robert Shiller and John Campbell created a valuation metric called the “cyclically adjusted price-earnings” ratio, or CAPE. A Wall Street Journal article from earlier this month examines whether this metric might be sending a false signal that the market is overheated. The CAPE ratio values shares based on 10 years rather than one year of earnings which, the article explains, “smooths out periods like just prior to the housing bust, when unusually strong earnings made stocks look reasonably priced, and post-recession recoveries, when weak earnings make stocks look expensive.” The CAPE is now at 27, about […]

Are Stocks Cheap or Expensive?

Yale’s Robert Shiller and Penn finance professor Jeremy Siegel have long dueled over whether stocks are cheap or expensive, and Daniel Fisher, of Forbes, reviews the arguments in his recent post. Shiller devised CAPE by measuring the inflation-adjusted earnings per share for the S&P over the trailing 10 years, instead of just the most recent quarter or year, and compared that number to long-run averages since 1871. The results showed a strong tendency for CAPE to revert to the mean — meaning when it was high, stocks tended to underperform going forward, and when it was below the long-term mean, […]

Jeremy Siegel’s Critique of the Shiller P/E Ratio and His Market Outlook

Financial Advisor reports on Wharton School of Finance Professor Jeremey Siegel’s comments at the annual Inside ETFs conference, where he critiqued the widely used Shiller P/E Ratio. Siegel did not necessarily attack the original logic of the Shiller P/E (which won its creator, Robert Shiller, a Nobel Prize). Instead, he noted that changes to the definition of generally accepted accounting principles (GAAP) earnings by Standard & Poor’s in 1990 have had an effect. Following the Financial Accounting Standards Board requirements, the GAAP change required mark-to-market accounting, which means companies mark down their assets when they have a loss but can only […]