Approaching a bear market
In a recent post by Project Syndicate, Nobel laureate and Yale economics professor Robert Shiller said that stock markets (SPY) are dangerously close to a bear market. Professor Shiller’s cyclically adjusted price-to-earnings (or CAPE) ratio is one of the most widely used market (QQQ) indicators. The ratio, which considers stocks’ ten-year earnings, is currently at 30. Historically, the CAPE ratio has reached above the long-term average of 22 during market peaks and before the beginning of a bear market. Professor Shiller also pointed out that volatility (VXX) in stock markets (IWO) is usually lower before the onset of a bear market.
Robert Shiller’s warning to investors
Though he highlighted that markets are closer to bear market territory, Professor Shiller said that a bear market is not imminent. He stated that “such episodes are difficult to anticipate, and the next one may still be a long way off.” However, he also said that the analysis should serve as a “warning against complacency” and investors who assume too much equity market risk today may be inviting considerable losses.
Uncertainty is likely to continue
As there is no way to predict a bull or a bear market, investors may stay put for fear of missing out on a bull run. President Trump’s tax reforms, fiscal spending, and continued earnings growth are all likely to retain investment, and very negative news would be needed to deter investor confidence. In the next part of this series, we’ll analyze the bond market’s performance after the Fed’s hawkish signal.