Are stock markets about to crash? If there’s anyone in the world worth asking, it’s Professor Robert Shiller, although you may not like his answer.
Shiller’s ‘CAPE ratio’ is among the most widely-used measures of whether markets are cheap or expensive, and he got the Nobel Prize for economics last year for his work on market volatility and asset prices.
So it’s chilling when he tells you that his CAPE ratio for US stocks has reached its present level on only three times in the past 130-odd years, and that those previous occasions were 1929, 2000 and 2007, each followed by a crash.
Shiller has been outspoken in recent months about his view that US stocks, bonds and homes are all highly priced right now.
His intervention has proved controversial and prompted fierce debate in America, where US markets have been notching up record highs.
In addition to the CAPE ratio (read explanation below), Shiller’s academic work has covered behavioural finance, which looks at the psychological and social reasons behind our money decisions.
He has also analysed house prices and along with Karl Case developed the ‘Case-Shiller Index’ of existing – as opposed to new – home sales in the US. The index is now under other ownership but remains an influential gauge of the strength of the US property market.
This is Money interviewed Professor Robert Shiller at the European Finance Association’s annual meeting and academic conference, held at Lugano in Switzerland last week.
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