Why Robert Shiller Is Worried About the Trump RallyIssue 03-20-17 |
The last time Nobel Prize-winning economist Robert Shiller heard stock-market investors talk like this was in the dot-com bubble, when traders were captivated by a “new era story” of technological transformation. Today, the game changer everyone’s buzzing about is Donald Trump and his bold plans to slash regulations, cut taxes, and turbocharge economic growth with a trillion-dollar infrastructure boom.
Shiller, who predicted the dot-com crash, wonders why traders are so fixated on the upsides of a Trump presidency when the downside risks seem just as big. For all his pro-business promises, the president's unorthodox management style has bred uncertainty — the one thing investors are supposed to hate most. Charts illustrating the conundrum have been making the rounds on trading floors. One worrisome chart shows a surging index of global economic policy uncertainty severing its historical link with credit spreads, which have declined in recent months, along with other measures of investor fear. At the same time, the VIX index of anxiety in the U.S. stock market has dropped more than 30 percent since Trump’s election.
One explanation for why the markets are so unvolatile now may be that share prices have less to do with Trump than with tangible improvements in the economy and corporate earnings. But one prominent analyst says pessimistic forecasters have so badly overestimated the consequences of big events in the last eight years that traders have become conditioned to ignore them. Finance professor Hersh Shefrin says the rally is just another example of investors’ remarkable penchant for tunnel vision and likens the current rally to the great tulip mania of seventeenth-century Holland.
Shiller says when markets are as buoyant as they are now, resisting the urge to pile in is hard, regardless of what else might be happening in society. On whether stocks are nearing a top, Shiller doesn't like to make short-term forecasts. One factor that makes him cautious is the cyclically adjusted price-earnings (CAPE) ratio, which implies that the market is highly overpriced, with stocks almost as expensive now as they were on the eve of the 1929 crash.