Spencer Platt—Getty Images
By Rob Wile
March 15, 2017

Donald Trump’s election has been a boon for stocks: Since Nov. 7, the Dow is up 17%, the S&P 500 is up 14%, and the NASDAQ is up 16%.

But Yale economist Robert Shiller, who won the Nobel prize for economics in 2014, says we should be skeptical of the surge.

As he recently told Bloomberg, we are again witnessing a case in which many investors may be valuing a narrative rather than fundamentals. A similar phenomenon happened in the dot-com bubble, he said.

“They’re both revolutionary eras,” Shiller said. “This time a ‘Great Leader’ has appeared. The idea is, everything is different.”

In his view, a herd mentality has developed. Everyone sees everyone else piling in, and the opportunity cost of losing out on further gains seems greater than playing it safe.

“I was tempted to do it, too,” he said. “Trump keeps talking about a new spirit for America and so you could (A) believe that or (B) you could believe that other investors believe that.”

The S&P 500 now trades on a cyclically adjusted price-to-earnings ratio of 30, according to the index Shiller created. That’s about where the market was right before the Great Depression hit, for what it’s worth, and it’s far higher compared to a historic fair value for this measure of about 16.

Shiller has also made the case that in the grand scheme, the recent stock market surge might not be as impressive as it seems. In January, as the Dow approached 20,000, Shiller wrote how easily investors discount inflation when they look at recent stock movements:

“The US has a policy of overall inflation. The US Federal Reserve has set an inflation ‘objective’ of 2% in terms of the personal consumption expenditure deflator. This means all prices should tend to go up by about 2% per year, or 22% per decade.

“The Dow is up only 19% in real (inflation-adjusted) terms since 2000. A 19% increase in 17 years is underwhelming, and the national home price index that Case and I created is still 16% below its 2006 peak in real terms. But hardly anyone focuses on these inflation-corrected numbers.”

The Dow hitting a record has less to do with fundamentals, Shiller explained, than with math and momentum: The closer you are to a record, the more likely you are to continue to set records — until the next shock comes.

For now, Shiller told Bloomberg, he is emphasizing bets in overseas markets, so as to avoid any uncertainty associated with the current trend in the U.S. market.

“The market is way over-priced,” he says. “It’s not as intellectual as people would think, or as economists would have you believe.”

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