Robert Shiller is most recognized for having created the word 'Behavioral economics'. Robert J. Shiller is currently a professor at Yale University in the department of Economics and Financial Markets.
The main focus of Robert J. Shiller's work is price-earnings ratio or the ratio of stock market capitalization to the total market capitalization. This is called the Shiller P/E ratio. Robert Shiller determined that investors look for stocks that are priced at bargain prices. When companies that are priced below their fair market value offer new shares on the open market, there will be rapid price appreciation. This is referred to as "bid pricing".
But, when companies are priced too high, known as "bidding", they tend to raise the price instead of offering more shares. The "cape ratio" is another measure of how buyers and sellers view the same asset.
The Yale University's economist's celebrated measure is the Cyclically-adjusted price-earnings ratio, or CAPE. The CAPE eliminates the distortions caused by big swings in profits that can make P/Es at any moment look artificially inflated or depressed.
The CAPE has no peers as a predictor of where big cap shares are headed. And right now, it's flashing bright red. The current reading, based on the S&P's record close of 3853 on January 21, is 35.13. It's only been that high in one period over the 140 years: in the run-up to the tech bubble that burst in 2000, sending the S&P down 44%.
Robert Shiller recently introduced a new yardstick that give the optimists a fresh narrative. It's called the Excess CAPE Yield. The formula takes the inverse of the CAPE–his measure of the profits the S&P is delivering for each dollar investors are paying. He then subtracts the "real" or "inflation-adjusted" yield on the 10-year Treasury. That number represents the margin that stocks are paying over bonds.
The Excess CAPE stands at 3.41%. That means stocks, which are extremely pricey, still beat bonds by a wide margin, mainly because bonds are offering lousy, less-than-zero returns far into the future.
The Shiller P/E ratio and the various other technical studies that Shiller published in his book, such as the Shiller DJIA, have been used by financial planners, analysts, and traders for years to aid in the determination of the health of a particular stock. They help investors make better decisions about where to invest.
Robert Shiller, who is a senior fellow at the American Institute of Investing, did write that the era of irrational exuberance is over. People are now more sensitive to stock market crashes than in the past. This sensitive nature is what led to the recent crash. Perhaps irrationality and complacency caused investors to buy stocks that were overvalued and gave a big boost to those companies who had no real business model, just bubbles.
However, from my perspective, Robert Shiller just gave the green light for investors to continue to buy overvalued stocks.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.
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