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Key phrases: It has been years since traders had been so afraid of a inventory market crash, warns the Nobel Prize winner

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“Nobody knows the future, but given the general lack of investor confidence amid a pandemic and political polarization, there is a chance a negative, self-fulfilling prophecy will flourish. This shows the importance of being well diversified in asset classes – including safe treasury bills – and not currently being overexposed in US stocks. "

This is Robert Shiller, a Nobel Prize-winning economist and professor at Yale who calls for a cautious approach to investing in the top-heavy stock market published for the New York Times.

"The coronavirus crisis and the November elections have pushed fears of a major market crash to their highest level in many years," Shiller wrote. “At the same time, stocks are trading at a very high level. This fleeting combination does not mean a crash will occur, but it does suggest that the risk of a crash is relatively high. This is a time to be careful. "

He said he came to this conclusion based on what he sees in several stock market confidence indices that he began developing decades ago.

In particular, its Crash Confidence Index is ringing the alarm bells. Shiller said he was asking this question of investors: "What do you think is the likelihood of a catastrophic US stock market crash, such as October 28, 1929, or October 19, 1987, in the next six months, including if." a crash has occurred in the other countries and is spreading to the US? “He said the bearish responses to that question had one of the lowest levels of confidence he has ever seen.

Shiller also pointed out the CAPE (Cyclically Adjusted Price Earnings) ratio, a measure he helped shape. It compares stock market valuations from different epochs by averaging the profits over 10 years and thus partially reducing the short-term volatility of each market cycle. Aside from preparing for the Great Depression in the 1920s and shortly before the dot-com bubble burst about 20 years ago, the CAPE rate is currently at a higher level than it has ever been in history. .

“Despite these signs of distress, the stock market has traded near record highs and raised equity valuations to fairly high levels,” Shiller said, adding that investors may be at a “crossroads” in this climate. "The question now is whether another memory of past crashes could come up to create a psychological sense of risk," he wrote. "Another spike in coronavirus cases, a chaotic or violent election, or any number of other events could shake people up."

As we head into the new week, when more than a third of the S&P 500 index components are scheduled to release quarterly results, some of these nervousnesses occur before the opening bell. Futures on the Dow Jones Industrial Average
YM00,
-0.55%,
S&P 500
ES00,
-0.54%
and tech-heavy Nasdaq Composite
NQ00,
-0.37%
are all on the way down.

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