It seems like only yesterday that Robert Shiller, a Nobel-Prize winning economist (and esteemed member of the Yale School of Management’s faculty), was telling anybody who would listen that the US equity market was headed for a vertigo-inducing correction.
But with stocks once again hovering near record highs, it seems that Shiller – the co-creator of the Shiller P/E ratio – has become the latest CNBC stalwart to throw in the towel. While sell-side banks (most recently SocGen) are increasingly focusing on the fallout from the Trump trade war, Shiller has pivoted to an analysis of other Trump economic policies like the Trump tax cuts and his rollbacks of regulation, which, taken together, have provided an unprecedented level of support to corporate America, per Bloomberg.
While he once lambasted President Trump as “totally unbecoming and unfit”, Shiller demonstrated a newfound reverence for Trump and his policies during his latest interview (we can only imagine why).
Shiller’s focus instead is on President Donald Trump’s support for corporate America, which he says is driving sentiment and market strength. The S&P 500 Index has climbed almost 9 percent this year, with the total return to investors running at an annual rate of more than 14 percent. It closed Thursday less than 0.5 percent from its August record high.
“It has something to do with our president, who is an exceptionally business-oriented president and who wants to deregulate and favors lower taxes,” he said. “That has an effect on the market but it goes beyond the rational, logical effect – it has something to do with our animal spirits. The U.S. is just doing great right now in terms of the strength of the economy and the stock market. That seems to be built around the Trump story at this point in history.”
And while the economist raised a stink last year as his vaunted Shiller P/E index surpassed its pre-crisis levels, the Yale professor is now using the tech boom (when companies’ near-$0 earnings caused the ratio to blow out to unprecedented levels) as his preferred reference point.
“The stock market could get a lot higher before it comes down. It’s highly priced, but it could get much more highly priced. It’s a risky market now,” Shiller told Bloomberg Television on Thursday.
While valuations may be stretched by historical standards, but by the standards of the tech boom, today’s valuations appear far less precarious.
Valuations may be among the most extreme in long-term history, but Shiller highlighted that they’re still well below the heady days of the technology boom at the turn of the century. The cyclically adjusted price-to-earnings ratio, which Shiller popularized to smooth out the effect of earnings over the longer run, currently sits at 33 times earnings. It reached as high as 44 in 2000, just before the dot-com crash.
However, a historical analysis of today’s valuations compared with equity valuations in 1929 paints a dimmer picture…
Readers should take all of the above with a grain of salt: last year, Shiller famously declared that he had trimmed his allocation to US equities and instead added to positions in foreign equities. Of course, anybody who has been keeping track of this year’s astonishing upside divergence, knows how well that worked out.