Shiller: It Will Be a Bumpy Ride, But Okay to Buy Stocks For Long Term
September 2, 2011
In an interview with Consuelo Mack on WealthTrack, noted Yale behavioral economist and predictor of the NASDAQ and housing bubbles, Robert Shiller provided a personal explanation of the genesis of the current financial crisis and added some advice and even a bit of hope for investors.
Though the market undoubtedly has its risks, “I think that one might make a substantial investment in the stock market now,” given its long-term success.
Shiller pointed to something he calls the CAPE ratio, a long-term price comparison average, rather than conventional price earnings calculations to gauge the market.
“The ratio recently has been around 20… the historical average is around 15. The stock market looks highly priced [and] the ratio is discouraging but not overwhelmingly [so].”
With that guidance, Shiller supplemented his statement with a caution of lurking danger, including “a real chance of a substantial drop in stock prices…”
A “big drop” may occur in response to financial drama both at home and overseas and the subsequent impact on the human psyche.
The “malaise we’re experiencing is due to some sense of hostility at the rich, hostility at our institutions and protracted disappointment,” Shiller said, adding that the collective negativity and damaged national pride is something of a self-fulfilling prophecy. “We’ve been in a slow period for five years and there’s a lot of finger pointing [that’s led to] the deterioration in our social compact.”
Despite declining spirit since the S&P downgrade, the economist is confident that foreign nations will remain loyal to the U.S., continuing to invest.
Shiller also went into detail about the lagging housing market, asserting that interest in home-buying has taken a nose-dive given the complexity of acquiring a mortgage and an utter unwillingness to spend.
“I think home prices could fall further. I don’t see clear signs that [the market is] going up.”
His indefinite prediction went so far as to reference the second World War era.
“I think that it’s a big unknown, where we’re going… economists are social scientists and the problem is that the recent crisis is a rare event. [To find anything comparable] we have to go back to the Great Depression.”
Though readily admitting the he is “not a financial adviser,” Shiller expressed his conviction that young people should surely, yet not aggressively, invest in stocks.
“As the stock market goes down, I think we should generally rebalance and put more in. As it goes down it becomes a better investment. Since April, people should be going in a little bit more.”
Ultimately, Shiller feels confidence is crucial and a controlling a factor in market rises and falls. He expressed that the cyclical nature of the emotion - “If we think confidence is returning, then confidence will return.”
Editor’s Note: Okay, we’ve heard from Professor Shiller, what do you think about buying here for the long term? Give us your thoughts in the comments section below.
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Comments
Ralph is right. This is another sell signal.
The major cycle measures I follow all concur that domestic equity markets turned bear Aug. 9. My take is that we've been in a bear market since the 10/07 top (a double top with that in 2000) of an 80 year cycle, and we are indeed headed down into 2015 -17. Buying stocks now for long-term? Only if you buy global dividend payers on dips, reinvest the dividends, and hold for 10 years or more. Really, I'm surprised at Prof. Shiller's investing reco, and I agree with Ralph that Shiller should stick to behavioral economics
I think Mr. Shiller should stick to economics and not investing. One should short stocks as they are going down and buy them when they are going up. To go long stocks in a declining market is foolhardy.