Shiller: "Stock market hugely overvalued"

According to American economist Robert Shiller, the US stock market is currently 'heavily overvalued'. That's not a good sign, since the same economist was also able to predict the dotcom bubble and the housing market bubble in the United States with fairly high accuracy. Shiller sees the current optimism on the stock market Similarities With the situation at the end of the nineties, when investors were also very positive.

Just like in the late 1990s, investors today mainly look at all the positive news, without sufficiently taking into account possible setbacks. As an example, Shiller cites the euphoria in the stock market after Trump's election. Investors have become very enthusiastic about the new US president's 'pro-business' agenda, while paying almost no attention to the downside of that policy. Since the U.S. election, the S&P 500 index has risen about 11%.

Equities overvalued

Shiller does not expect a decline in the stock market in the short term, but he does say that he is cautious by not buying any more shares at this price level. The U.S. stock market has been in a bull market since the beginning of 2009, a rally that has lasted for almost eight years now and is largely driven by extremely low interest rates.

Robert Shiller developed his own methodology for determining the valuation of shares, the so-called Shiller P/E Ratio. This compares the price of a share to the earnings of the past ten years. According to Shiller, by taking the earnings figures of a longer period, you get a better indication of the true value of a stock. This index is at 29.30 at the time of writing, a level we haven't seen since the stock market bubble of the late 1990s.

Also from a historical perspective, US equities are relatively expensive at the moment. The following graph shows the development of the Shiller P/E Ratio over more than a hundred years. Based on this chart, you could indeed conclude that the share price is relatively high, but that the overvaluation could become much greater than it is now. With a Shiller P/E Ratio of nearly thirty, stocks are now valued as highly as they were just before the great stock market crash of 1929.

Stocks are overvalued, according to economist Robert Shiller (Source: Multpl)