Prof. Robert Shiller - Don't Sell (Maybe)

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by: Bill Kort

Robert Shiller

“I can see it as a real possibility that stocks prices and house prices would both keep going up for years (maybe), but I’m not forecasting that by any means.”– Robert Shiller. Even though this is a qualified opinion it is still quite a revelation, as the good professor, co-inventor of the Cyclically Adjusted Price-to-Earnings Ratio (CAPE), has been flashing the investment world a caution to an outright sell using his methodology for at least as long I have been publishing kortsessions (February 2013). During that time the S&P 500 is up over 57%, with the index closing at a new all-time high of 2415.82 on Friday, May 26, 2017.

Let’s take a trip back in time to “Double, Double … fire burn and cauldron bubble”

and Kort Session 75 –12/5/2013

Did someone say, “bubble?” Oh yes, thanks to a front page article on MarketWatch.com Monday morning (12/2/2013), we were peppered with “bubble” references the rest of the day. The article quoted Nobel Laureate, Yale Professor Robert Shiller, who is “most worried” about the “boom” in the U.S. stock market. Now, Shiller did not actually say the market was in a bubble (he still owns stocks), but he hinted around the edges. The door was opened. MarketWatch, CNBC and others took the opportunity to remind us of Professor Shiller’s outstanding record of calling bubbles… the housing bubble (he wrote a book about it prior to its bursting – ”Irrational Exuberance”) and the “Dot.com” bubble. Ergo, Shiller knows BUBBLES and he may have another spotted. Again, this was an excerpt from a post I wrote three and a half years ago. Like today’s post Shiller equivocates. “He still owns stocks.” In the subsequent (3 1/2) years you would be amazed how many times Shiller’s PE has been quoted by the bears as a reason to sell or stay out of the market. This post from December 11, 2016 (just six months ago), is a typical example:

CNBC -“Market indicator (Shiller PE) hits extreme last seen before plunges in 1929, 2000 and 2008." This headline and post are in unbelievable contrast to the following second excerpt from Mike Santoli’s CNBC interview with Robert Shiller (5/24/2017). BTW, the EXTREME level was over 27.

I would say have some stocks in your portfolio. It (the market) could go up 50 percent from here. That’s what it did around 2000, after it reached this level, it went up another 50 percent. So I’m not against investing in the stock market when you consider the alternatives. But I think if one wants to diversify, US is high in its CAPE ratio. You can go practically anywhere else in the world and it’s lower,” Shiller said. “We could even set another new record high in CAPE, that’s not a forecast.”

Interestingly, I find myself in total agreement with the points that Shiller makes in the paragraph above. SHOULD I BE WORRIED?

On another often quoted concern: Sub-par U.S. GDP Growth

Since this economic recovery began, coming out of the depths of the financial crisis, many economists and politicos have complained that it was sub-par, painfully slow versus other post-WWII recoveries, with average real GDP growth running only at about 2%. Of course, it was blamed on faulty administration policies. My contention is that much of this was out of the administration’s control. My reasoning is as follows.

  • First and foremost, since WWII we had never had a financial meltdown akin to 2008. The closest comparable was 1929. It took the onset of WWII to pull us out of that depression.
  • After the stimulus bill of 2009, that was it … no more. In fact, in 2013 the Congress and White House agreed on “The Sequester,” a 10% across the board cut in all federal spending in order to avoid a government shutdown (essentially an austerity move).
  • Meanwhile, China (now the world’s second largest economy) decided to slow its economic growth rate from a torrid 12% to 14% to a more manageable 7%.
  • On the other side of the world, Europe decided to treat their financial crisis with a strong dose of austerity, thus keeping the EU (an important trading partner) in long-term recession.
  • Then there was the constant drumbeat of political rhetoric telling all ‘how bad things were’, not actually borne out by the facts, but in the pursuit of scoring political points. This worked against confidence, a cornerstone of a growing economy.
  • Finally, lest we forget, there is the ongoing effect of growing worldwide competition… i.e. Globalization.

Taking all of the above into consideration it is easy to see why our economic growth during this recovery has been less than prior bounces out of recession. In my mind, however, our recovery has been remarkable in the face of all the aforementioned obstacles. As such it makes me crazy when I see politicians and the media (trying to rope people in with negative headlines) putting out stories like this: “The disappointing U.S. economy keeps coming up short” (CNBC). The facts would indicate we are doing pretty well under the circumstances, and that those circumstances may be about to change in our favor as the rest of the world is beginning to grow again.

Finally, like the previous administrations, the current administration will have very little to do with a stronger tone to the U.S. economic growth. It will most likely be the forces of a sub 4.5% unemployment rate and globalization working in our favor.

What are your thoughts?