Nobel Laureate Robert Shiller Says U.S. Stock Market Entering Into Bubble Territory
The Dow, a sign of America’s top companies, is foreshadowing what is happening in the country today as there are some signs of an upcoming stock market crash.
Whether it’s banking, insurance, industrial, retail, or technology, the blue chip Dow Jones Industrial Average has been a big disappointment this year, down over 11% from its high. The selling suggests to me that the next wave of corporate results due out in a few weeks will again show another bad quarter and a potential sell-off in stocks.
Earnings in the third quarter are estimated by FactSet to contract 4.5%, which would be the second straight quarter of contraction. (Source, FactSet, last accessed September 25, 2015.). This would be the first time since 2009 that this has occurred, making the stock market vulnerable.
Revenues are expected to continue to be stagnant with a decline of 3.3% versus an estimate calling for a one percent drop at the end of June. How can the economy grow when companies continue to see revenue contraction nationwide? This doesn’t make a whole lot of sense to me and also doesn’t bode well for the rest of the year.
Perhaps the Dow is a pretty good leading indicator of what is to come.
Stock Market Crash to Surface
Robert Shiller, the Nobel laureate for economics, has been a bear for quite some time.
So far, he has been largely off the mark. But that could change as he is warning once again the stock market is “overheated” based on stalling long-term economic renewal. (Source: Yahoo Finance, September 25, 2015.)
According to Shiller, the value of his proprietary CAPE ratio, a measure of stock prices to earnings over 10 years, is overpriced at 24.5 versus the average of 17. Interestingly, the reading is close to where the CAPE was prior to the sub-prime crash in 2007.
What the CAPE suggests is that unless earnings begin to ratchet higher (and they are not), stock prices would need to retrench lower in order to come closer to the norm.
The reality is you are paying pretty high multiples for an economy that is still only growing moderately. This is where companies find it difficult to deliver growth.
The Middle Class is dead and have minimal funds to spend despite the height of the stock market and housing market recovery. The top five percent are spending. But it’s not sufficient to vault the economy higher and replace the destruction of the Middle Class.
Of course, you can thank the Federal Reserve for dealing out this monetary cocaine that has been injected into the veins of Americans for over six years and counting.
Whether Schiller is finally right this time around is still unknown. But the reality of a stock market crash is not that out-of-the-realm, especially if things don’t pick up.