Even the most casual students of financial history are familiar with the frenzy, during which a rare tulip bulb was worth enough money to buy a mansion. What often gets overlooked, though, is that the mania happened during an outbreak of bubonic plague.
“People were dying left and right,” Shefrin says. “So here you have financial markets sending signals completely at odds with the social mood of the time, with the degree of fear at the time.”
Shiller says when markets are as buoyant as they are now, resisting the urge to pile in is hard regardless of what else might be happening in society.
“I was tempted to do it, too,” he says. “Trump keeps talking about a new spirit for America and so you could (A) believe that or (B) you could believe that other investors believe that.”
On whether stocks are nearing a top, Shiller can’t say with any certainty. He’s loathe to make short-term forecasts.
Despite the well-timed publication of his book “Irrational Exuberance” just as the dot-com bubble peaked in early 2000, the Yale University economist had warned (with caveats) that shares might be overvalued as early as 1996. Investors who bought and held an S&P 500 fund in the middle of that year made about 8 percent annually over the next decade, while those who invested at the start of 2000 lost money. The S&P 500 sank 49 percent from its high in March 2000 through a bottom in October 2002. The index has gained 6 percent this year, with futures slipping 0.1 percent before the open of U.S. exchanges on Tuesday.
What Shiller will say now is that he’s refrained from adding to his own U.S. stock positions, emphasizing overseas markets instead. One factor that makes him cautious on American shares is the S&P 500’s cyclically-adjusted price-earnings ratio: While the metric is still about 30 percent below its high in 2000, it shows stocks are almost as expensive now as they were on the eve of the 1929 crash.
“The market is way over-priced,’’ he says. “It’s not as intellectual as people would think, or as economists would have you believe.’’
This article was provided by Bloomberg News.