Since the economic downturn and the beginning of the Great Recession, the United States stock market has somewhat rebounded primarily due to monthly stimulus courtesy of the Federal Reserve. Whatever the reason is for the increase in stock prices, one economist is urging investors to buy stocks.
Robert Shiller, a Nobel laureate Keynesian economist at Yale University, told Yahoo! Finance that it is true that stocks are quite expensive on a valuation basis, but it doesn’t necessarily mean that investors should avoid them. Instead, if there have been some bears, it’s time to enter the market as a bull.
Shiller helped create the cyclically-adjusted price-earnings (CAPE), a price-earnings ratio, that analyzes averages over a 10-year period. The CAPE ratio is now standing at 25.2, higher than the average of 16.5 since the year 1881. He noted that it was high since it was introduced to the Fed in 1996 and it continued to rise for three years following.
“Even though it’s high, I still think stocks ought to be part of someone’s portfolio,” Shiller explained. “We’re just not living in the best of times. Momentum is weakening in housing, stocks look overpriced, bonds are paying poorly. There’s risk there too. There’s no easy way to win in this market, so I’m thinking you have diversify and probably keep something in stocks.”
Many investors are arguing that stock prices can go higher because interest rates will likely remain low for another two years and the economy is improving. If there was any time to get some skin in the game then now would be the appropriate time to do so.
However, Shiller warned late last year the U.S. stock market is approaching bubble territory.
“I’m not sounding the alarm yet. But in many countries the stock price levels are high, and in many real estate markets prices have risen sharply…that could end badly,” Shiller told a German news magazine in December. “I find the boom in the U.S. stock market most concerning.”
He added that the U.S. economy still continues to be “weak and vulnerable.”
Shiller isn’t the only finance expert to be concerned about a bubble. David Stockman, former White House budget director and bestselling author of “The Great Deformation,” has repeatedly stated that the Fed is producing a massive bubble that will create domestic and international strife in the markets.
“Now we have the greatest mother of all bubbles. And there’s nobody left in the stock market today except drugged-up day traders and robots who are being mainlined by the daily injections of liquidity from the Fed. This is utterly irrational,” Stockman said in an interview with Fox Business Network (FBN). “It tells you the clear and present danger in America is that the Fed is run by people who are in some medieval castle somewhere, and they lost track of the real world.”
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Peter Schiff, president of Euro Pacific Capital, has echoed the sentiments on several occasions. Speaking with the Epoch Times in March, Schiff described the U.S. economy as a “disaster” and “all screwed up.”
“We got this phony bubble economy that gets bigger and bigger. People focus on the stock market. They say, ‘Well the stock market is going up that must mean the economy is getting better.’ No it doesn’t,” stated Schiff. “There is just a lot of cash, a lot of inflation created by the central banks. So they are able to inflate a bubble in stocks or in real estate, but they are not able to generate legitimate economic growth.”
Other contrarian investors say that a sign the stock market is in a bubble is because of enormous margin credit buying for stocks.