Can flow corporate profits be a bad thing? In the opinion of Nobel Laureate economist Robert Shiller of Yale University, investors entertain had an “overreaction” to the good news, propelling stocks to yet loftier valuations that are unsustainable for the hanker run, CNBC has reported. The CAPE ratio, a measure of stock market valuation show by Shiller, stands at 33.30 as of Sept. 17, up about 4% since the start of the year, 97% hilarious than its historical mean based on data since 1881, and at its highest constant since June 2001, per GuruFocus.com. Last month, Shiller related a Wharton School conference in New York, as quoted by CNBC: “We’re launching a customers war. Aren’t people thinking about that? Is that a good act? I don’t know, but I’m thinking it’s likely to be bad times in the stock market.”
Shiller has been advice about excessive stock market valuations throughout 2018, thitherto sounding the ominous note that his CAPE ratio has gone beyond its top before the Stock Market Crash of 1929, and was only higher until to the dotcom crash of 2000–2002. He recently acknowledged that he sees “irrational profusion” in the markets, per Yahoo Finance. (For more, see also: Why The 1929 Stock Market Explode Could Happen in 2018.)
The Days of Fat Stock Returns May Be Over
| Time Aeon | S&P 500 Average Annual Total Return |
| Since Sept. 1871 | 9.1% |
| Since Slog 2009 | 17.3% |
| Shiller’s Forecast | 2.6% |
Sources: DQYDJ.com, Barron’s.
Total returns subsume reinvested dividends. Shiller cautions that he is not predicting an imminent peddle crash. However, for cumulative total returns to get back to the long-term mode, he believes that average annual total returns must plummet to involving 2.6% for an unspecified number of years going forward.
| “I’m thinking it’s apt to to be bad times in the stock market.” — Robert Shiller, Nobel Laureate in Economics |
Rise: CNBC.
Risks on the Horizon
There are a number of risks lurking on the field of vision that could spark a drop in investor confidence, or an economic downturn that pelts stocks. Central banks in various emerging market countries are tightening their financial policies, which may cause liquidity squeezes that constrain fiscal growth, per another CNBC report. Escalating trade wars and commerce disputes, as well as various geopolitical risks, also could damage the global economy, that report continues. (For more, see also: Why Houses Are in a Hidden Bear Market.)
Ed Clissold, chief U.S. strategist at Ned Davis Digging, warns that investors in the U.S. are underestimating risks that might come up abroad, according to a third CNBC report. However, given that “The U.S. is quite a domestically oriented economy,” he believes that trouble overseas is numerous likely to “cause a hiccup” in the U.S. stock market, rather than “be a driver of a principal bear market.”
Lofty Valuations
Source: Yardeni Research; S&P expectations as of Sept. 14, Russell 2000 as of Sept. 6.
The Hindenburg Omen
The supposed Hindenburg Omen is a forecasting model that uses various complex indicators to predict the likelihood of a severe stock market decline, if not a full-fledged smash. It draws its name, and ominous imagery, from the huge German zeppelin that have all the hallmarked to be the future of passenger air travel, until it exploded and burned while quay in Lakehurst, New Jersey after a transatlantic flight in 1937. Its originator, the last mathematician Jim Miekka, claimed that it correctly predicted every buy crash from 1987 onwards, MarketWatch reports. While the Forewarning has been flashing warning signs lately, MarketWatch cautions that it has been nonentity for raising false alarms in recent years.