With the likes of Robert Shiller fretting over valuations, what’s an investor to do? Maybe industrials …
Opinions are increasingly divided on whether the ongoing bull market in U.S. stocks has more room to run, or whether valuations are so high that a correction—and a significant one at that—is all but inevitable. Unfortunately for investors, there doesn’t seem to be a clear answer, which makes asset allocation at this point particularly tricky.
There’s no question that in the past three to five years, buying into a universe like the S&P 500 has paid off. Consider that a fund like the SPDR S&P 500 (SPY | A-98) has delivered more than 63 percent in total returns in the past 36 months.
Chart courtesy of StockCharts.com
Looking back to when SPY bottomed out at the height of the credit crisis in March 2009 around $68 a share, it has now rallied an impressive 186.5 percent in the past five years or so. These gains have come thanks largely to an unprecedented quantitative-easing program from the Federal Reserve, but without significant economic growth.
In fact, U.S. GDP expansion remains muted even as interest rates sit at historically low levels, with the most recent quarterly reading pegging U.S. GDP growth in negative territory.
Valuations Are Sky-High
If you listen to experts like Nobel Laureate Robert Shiller, professor of economics at Yale University, you too might be “definitely concerned” about the prospects for a major downward correction.
In his most recent interview with Yahoo’s Daily Ticker today, Shiller pointed out that U.S. stock valuations—as measured by his CAPE ratio—are around 26, and have only been that high three times before: in 1929, 2000 and 2007. The historical average is around 17.
“The very low interest rates are a sign that maybe you want to keep more invested in the stock market now rather than getting nothing,” Shiller said in the interview. “It ought to help explain the high CAPE ratio, but that doesn’t mean that a high CAPE isn’t a forecast of bad performance.”
History shows that 1930, 2001 and 2008 weren’t particularly good years for U.S. stocks.
“We don’t know what the market is going to do,” Shiller said. “We could see a massive crash, but realistically, stocks should be in one’s portfolio, so maybe just lighten up [on exposure].”