Instead of focusing on a possible interest rate hike from the Federal Reserve, investors should be worried about nosebleed valuations in U.S. equity markets and a possible stock market bubble. At least, that’s according to Nobel Prize-winning economist Robert Shiller.
Measuring the stock market’s current valuation by his cyclically adjusted price earnings ratio—which is price divided by 10-year average earnings—Shiller says “the market valuation is higher than it’s been, except 1929, 2000 and 2007,” which were ominous years for financial markets. (Source: CNBC, last accessed July 3, 2015.)
When he was asked about whether or not he still has some personal investments in U.S. equities, he said yes, but warned that U.S. stocks are being too overexposed. He suggested the time for diversification has come, emphasizing that the U.S. stock market is one of the most expensive in the world right now: “Some people are not very diversified internationally. This is a good time to rethink that.”
In regard to the health of the housing market, as the housing market has been recovering, Shiller said, “Moderate increases in home prices may continue for a year or so.”
The economist added that the momentum in the housing market is diminishing. He said, “We saw a bottoming out of the housing market in most U.S. cities around 2012. And then we saw really rapid increases … [which are] starting to fade.”
For investors, Robert Shiller is certain that the U.S. stock market is overvalued. Confidence is in level with the market; the market is at its lowest since 2000; and the momentum in the housing market is diminishing.