Even after a hawkish Fed in its September meeting, Wall Street didn’t pause materially. Naturally, overvaluation worries have been glued to the latest equity market rally. “But that doesn’t mean it’s time to sell everything, according to the Nobel-winning author Robert Shiller,” as per an article published on Business Insider.
In the top months before a bear market approaches, the CAPE ratio – which is the average inflation-adjusted earnings from the previous 10 years – was above its average of 22.1. But on Sep 22, 2017, the ratio was slightly higher than 30. The metric is at about 80% premium to the mean Shiller PE Ratio of 16.77 times. This high number, in the absence of materialization of most of the pro-growth promises made by Trump, calls for a correction in the near term.
In fact, the inventor of the ratio – Nobel laureate Robert Shiller – issued warnings for investors a few days back. He believes that price increase go hand in hand with earnings increase. But the latest market behavior seems to be “an overreaction to good earnings” to Shiller. The ongoing complacency in the market is probably the lull before the.