The list of notable investors claiming the market is substantially overvalued is growing. In addition to the reports from Comstock, Andrew Smithers & Jeremy Grantham, David Rosenberg is now pointing out Robert Shiller’s cyclically adjusted PE. Rosenberg has some interesting thoughts on the currently overvalued market:
The noted Yale economist, Robert Shiller, calculates a very interesting cyclically-adjusted price-to-earnings ratio. Instead of using 12-month earnings (which can be very volatile, especially recently), he uses a 10-year average of earnings. He has compiled an incredible data set, with the data going back to 1881, so you get a true sense of history.
For October, the Shiller P/E is just over 20x (the 125-year plus historical average is about 16x). It’s true that this metric is not as overvalued as in past peaks (in the dotcom era, it went over 40x), but it’s interesting to know that when we usually see 20x, it’s not at the end of a recession but five years into an economic expansion. Shiller is skeptical on the recent boom in the stock market (and housing as well for that matter). On stocks, he said recently “you have to go back to the Great Depression to see such a turnaround in the stock market” and that the current booms (both stocks and housing) “…can’t be trusted to continue.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.