There isn’t a full-on stock market bubble breaking out, but it sort of looks like it.
In an interview with Goldman Sachs’ Allison Nathan this weekend, Yale professor and Nobel Laureate Robert Shiller was asked if the stock market is currently in a bubble.
Shiller wouldn’t go so far as to say we’re definitely in a bubble, but said there are some things about today’s current market that look an awful lot like one.
￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼￼I define a bubble as a social epidemic that involves extravagant expectations for the future. Today, there is certainly a social and psychological phenomenon of people observing past price increases and thinking that they might keep going. So there is a bubble element what we see. But I’m not sure that the current situation is a classic bubble because I’m not certain that most people have extravagant expectations.
On Saturday, Business Insider’s Henry Blodget argued that stock prices right now look awfully high and said he thinks returns going forward are going to be lousy.
In that post, Blodget cites Shiller’s CAPE ratio, or cyclically-adjusted price-to-earnings ratio, a measure of inflation-adjusted earnings over the last 10 years, which is currently at around its third-highest level ever.
The only times Shiller’s CAPE ratio was higher was ahead of the 1929 and 2000 stock market crashes. The Shiller CAPE ratio is about equal where it was before the 2007 crash.
In his comments to Goldman Sachs, however, Shiller again echoes something he’s said in the past, which is that the current stock market rally is driven in part by fear. And this behaviour makes the current boom a bit different from a “classic bubble,” and is part of what keeps Shiller hedging when characterising the current market environment.
In fact, the current environment may be driven more by fear than by a sense of a new era. I detect a tinge of anxiety and insecurity now that is a factor in markets, which is quite different from other market booms historically.
In 2000, Shiller published the first edition of his famous book “Irrational Exuberance” right at the top of the Nasdaq bubble. And so when Shiller talks about bubbles people listen.
It seems then, to Shiller, that though we’re not in a classic bubble, the US market is at levels where we should be worried, at least a little bit, about how expensive stock are right now.
As a reminder, here’s Shiller’s CAPE ratio.