Nobel laureate economist Robert J. Shiller says that American market can crash despite being in a healthy position now.
Stock markets are trading at very high levels in the United States. But Nobel Laureate, Yale professor Robert James Shiller has a word of caution. He says the coronavirus crisis and the Trump-Biden dilemma in the US presidential elections have driven fear of market crash to an unprecedented high. He says that the paradoxical situation doesn’t mean that a crash will certainly happen, but the chances are relatively high. Investors need to be extremely wary and careful, says Shiller.
The coronavirus crisis and the US presidential elections have driven fear of market crash to an unprecedented high.
These remarks are the conclusion of a long research, including findings from the stock market confidence indexes that he began to develop more than 30 years ago. Shiller drew indexes from surveys of a random sample of high-income individual investors and institutional investors in the US that are now conducted monthly by the International Center for Finance at the Yale School of Management.
Watch: What’s Next For The US Economy| Robert J. Shiller
For the measurement of sentiments about the safety of the stock market, Shiller asked a question from individual investors: “What do you think is the probability of a catastrophic stock market crash in the United States., like that of October 28, 1929, or October 19, 1987, in the next six months, including the case that a crash occurred in the other countries and spread to the U.S.?”
And Fear Was Found
To know the level of sentiments, Shiller took the percentage of people who think the probability of such a dismal crash is 10%. He said the percentage of individual investors with that possibility hit a new low, 13%. His last findings on September 15 were also ‘extremely low’. On the other hand, institutional investors, who opt for pension funds, mutual funds and endowments, were a bit more confident as their September reading was 24%. But on a scale of 100, it is also extremely low.
The crux of the analysis is that the majority of investors feel there was a greater than 10% possibility of an imminent crash, an indicator that people are skeptical of the market situation. Shiller said that the Valuation Confidence Index is also near a record low. He posed a question to know its magnitude: “Stock prices in the US, when compared with parameters of true fundamental value or sensible investment value, are: 1. Too low; 2. Too high; 3. About right; 4. Do not know”?
Valuation Confidence Index is also near a record low, an indicator that majority of investors are skeptical of the market situation.
This survey was to know the percentage of investors who think the market is not too highly priced. The latest reading of September shows that 38% respondents feel so. Surprisingly, it was far lower than during the March 2009 slump when the percentage of such investors was 77%. For institutional investors, the percentage was slightly higher than the individuals at 46%, but much lower than 82% of March 2009. Now, the question is why, despite signs of a distressed economy, stocks are trading near a record high? Shiller says it’s because confidence in investors is low but actual stock valuation is quite high.
Takeaway For Investors
Shiller presents an interesting observation that low confidence ratings and high stock prices will not be the only factors for market crash. He says there has to be one more dynamic factor which could be in the face of rise in coronavirus cases, chaotic and violent elections, or any similar reason that can shake up investors’ confidence.
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He advises investors to remain cautious in their stock market holdings. Shiller says the investors should be well diversified in asset classes — including Treasury securities, which are safe — and not exposed to US equities now.
Investors should remain cautious in their stock market holdings and be well diversified in asset classes.
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