Nobel winner Robert Shiller urges savvy investors to stay in the stock market because it “could go up 50 percent from here.”
The Yale economics professor told CNBC that he believes investors should continue to own stocks because the bull market may continue for years.
"I would say have some stocks in your portfolio. It 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," he explained.
"So I'm not against investing in the stock market when you consider the alternatives. But I think if one wants to diversify, U.S. is high in its CAPE ratio. You can go practically anywhere else in the world and its lower," said Shiller, who was awarded the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen in 2013.
"We could even set a new another record high in CAPE, that's not a forecast," he said.
Shiller developed the cyclically adjusted price-earnings (CAPE) ratio market valuation measure, which is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation, CNBC reported.
The economist's research found future 10-year stock market returns were negatively correlated to high CAPE ratio readings on a relative basis.
However, even though the current CAPE ratio is at 29, which is above the 17 historical average, the economist is not calling for a market decline.
"I can see it as a real possibility that stocks prices and house prices would both keep going up for years, but I'm not forecasting that by any means," said Shiller, who also helped develop the widely-followed S&P/Case-Shiller Home Price Indices.
Meanwhile, Newsmax Finance Insider Lance Roberts recently took Shiller's CAPE to task.
Shiller’s measure, created with Harvard University economist John Campbell in the 1990s, is called the “cyclically adjusted price-earnings,” or CAPE ratio. The index, sometimes called the “Shiller P/E,” essentially divides share prices by the average of 10 years' earnings adjusted for inflation. It compensates for extreme volatility by valuing share prices based on 10 years of earnings, rather than one year.
But the debate over the value, and current validity, of the Shiller’s CAPE ratio, is not new. Critics argue that the earnings component of CAPE is just too low, changes to accounting rules have suppressed earnings, and the financial crisis changed everything," Roberts wrote for Newsmax Finance.
Roberts explained that this was a point made by Wade Slome previously:
“If something sounds like BS, looks like BS, and smells like BS, there’s a good chance you’re probably eyeball-deep in BS. In the investment world, I encounter a lot of very intelligent analysis, but at the same time I also continually step into piles of investment BS. One of those piles of BS I repeatedly step into is the CAPE ratio (Cyclically Adjusted Price-to-Earnings) created by Robert Shiller.”
(Newsmax wires services contributed to this report).
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