U.S. stocks are vulnerable to losses because they are the most expensive relative to earnings in more than five years, according to Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences.
The CHART OF THE DAY tracks Shiller’s cyclically adjusted price-earnings ratio, which compares the Standard & Poor’s 500 Index with companies’ average profits during the past 10 years. The ratio ended last month at 23.7, the highest since January 2008, according to data available from his website.
“The stock market is rather highly priced,” he said yesterday during a press conference at Yale University in New Haven, Connecticut, where he serves as a professor of economics and finance. “I worry that it might correct down.”
Even so, the September ratio was lower than a peak of 27.5 in May 2007 -- and even further below a record of 44.2, set in December 1999. Shiller’s price-earnings figures begin in 1881, and the chart shows them since 1900.
“I don’t think one should view it with alarm,” he said about the most recent reading for the gauge, known as CAPE. “One could well -- and probably should, in a diversified portfolio -- invest in stocks.”
Shiller developed the cyclically adjusted ratio with a Harvard University professor, John Y. Campbell. He shared the Nobel with two University of Chicago professors, Eugene F. Fama and Lars Peter Hansen.