With major benchmark indices hovering around all-time highs, equities and stock exchange traded funds might be peaking, according to Robert Shiller.
Shiller, a Yale professor and Nobel laureate, is “definitely concerned” about the current stock market environment based on the cyclically adjusted price-to-earnings ratio, or CAPE ratio, reports Aaron task for Yahoo! Finance.
The so-called Shiller P/E ratio is currently hovering around 26.2, compared to the long-term mean of 16.5. The CAPE ratio has been this high only three times – 1929, 2000 and 2007, and in each instance, the markets foreshadowed a steep market turn.
“It looks to me like a peak,” Shiller told Yahoo! Finance. “I would think there are people thinking ‘it’s gone way up since 2009, it’s likely to turn down again.’ That’s what people might plausibly think.”
The CAPE ratio, or Shiller P/E ratio, is a valuation measure applied to broad equity indices and utilizes real per-share earnings over a 10-year period. Specifically, the CAPE take the annual EPS of an equity index for the past 10 years, adjusts earnings for inflation using the CPI, takes the average of these real EPS figures for the period, and divides the current level of the index by the 10-year average EPS.
In comparison, the regular price-to-earnings ratio, or P/E ratio, is the ratio of a company’s current share price compared to its per-share earnings. Consequently, a high P/E indicates that investors expect a company to produce higher earnings growth.
Some have argued that the CAPE ratio provides an overly bearish outlook. In comparison, SPDR S&P 500 (NYSEArca: SPY), Vanguard S&P 500 ETF (NYSEArca: VOO) and iShares S&P 500 Index (NYSEArca: IVV) all show a P/E reading of 17, according to Morningstar data. The S&P 500 index shows an average P/E of 15.5.
The SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) is showing a slightly cheaper valuation, with a P/E of 15.3.
“We don’t know what it’s going to do,” Shiller added. “Realistically, stocks should be in one’s portfolio but maybe lighten up.”
While Shiller may be sounding a warning, he argues that investors shouldn’t abandon the equities market altogether. [Don’t Let New Highs Scare You Away From Stock ETFs]
“I’m still in the market,” Shiller said, according to Business Insider. “But I’m thinking of pulling back somewhat.”
For more information on the stock markets, visit our current affairs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.