Investors have also feared stock market crash for years, warns Nobel Prize-winning economist


“No one knows the future, but given the general lack of investor confidence amid a pandemic and political polarization, there is a chance that a negative and self-fulfilling prophecy will flourish. This underscores the importance of being well diversified across asset classes – including Treasury securities, which are safe – and of not being overexposed to US equities now.

It’s Robert Shiller, Nobel Prize-winning economist and professor at Yale, who urges a cautious approach to investing in the heaviest stock market in a New York Times op-ed.

“The coronavirus crisis and the November election pushed fears of a major stock market crash to their highest level in many years,” Shiller wrote. “At the same time, stocks are trading at very high levels. This volatile combination does not mean that a crash will occur, but it does suggest that the risk of a crash is relatively high. Now is the time to be careful. ” He said he came to this conclusion based on what he saw in several stock market confidence indices that he started to develop decades ago.

More specifically, its Crisis Confidence Index is sounding the alarm bells. Shiller said he was asking investors this question: “What do you think is the likelihood of a catastrophic stock market crash in the United States, like the one on October 28, 1929 or October 19, 1987, in the next six months? understood the case where a crash occurred in other countries and spread to the United States? He said the bearish responses to this question recorded one of the lowest confidence readings he had ever seen.

Shiller also highlighted the Cyclically Adjusted Price Ratio (CAPE), a metric he helped create. It compares stock valuations from different eras by averaging earnings over 10 years, thereby reducing some of the short-term volatility of each market cycle. The CAPE ratio, he explained, is currently at higher levels than any period in history except for the period leading up to the Great Depression in the 1920s and just before the outbreak. of the dot-com bubble about 20 years ago. .

“Despite these signs of distress, the stock market traded near an all-time high, stretching stock valuations to fairly rich levels,” said Shiller, adding that investors could be at a “crossroads” in this. weather. “The question now is whether another reminder of the accidents of the past could emerge to create a psychological sense of risk,” he wrote. “Another upsurge in coronavirus cases, a chaotic or violent election or any other event could well shake people up.”

As the new week approaches, with more than a third of the S&P 500 index constituents due to release quarterly results, some of these hassles show up before the opening bell. Futures on the Dow Jones Industrial Average YM00,
S&P 500 ES00,
and high-tech Nasdaq Composite NQ00,
all go lower.


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