Thursday, April 4, 2019

Robert J. Shiller: "Was the Stock-Market Boom Predictable?"

Doc Shiller is one of our fave economists (actually a pretty short list) in part because he somehow got Irrational Exuberance published in March, 2000 with the NASDAQ hitting its (then) all time closing high of 5048 (subsequent low 1114, how's a 78% decline grab ya?) he is the keeper of the Cowles Commission records.* From one of our Forecasting Equity Returns posts:
A subject near and dear to my heart. I may be the only person I've ever met who read every page of "The Cowles Commission's Common Stock Indexes 1871-1937".
[you must be a blast at parties -ed]
Here's his Yale homepage.

And Irrational Exuberance.

*Here's Common Stock Indexes...
....My favorite tidbit is the listing, among the pre-1871 industrials, of New York Guano.
Some things never change.


From Project Syndicate, March 28:
Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof. 
Was the Stock-Market Boom Predictable?
While the conventional wisdom holds that it is never possible to "time the market," it might seem that major shifts – like the quadrupling of the US stock market over the last decade – should be at least partly foreseeable. Why aren't they?
NEW HAVEN – Should we have known in March 2009 that the United States’ S&P 500 stock index would quadruple in value in the next ten years, or that Japan’s Nikkei 225 would triple, followed closely by Hong Kong’s Hang Seng index? The conventional wisdom is that it is never possible to “time the market.” But moves as big as these, it might seem, must have been at least partly foreseeable.

The problem is that no one can prove why a boom happened, even after the fact, let alone show how it could have been predicted. The US boom since 2009 is a case in point.

In looking at the US stock market, it is important to bear in mind that its participants are overwhelmingly US investors. According to a US government study published last year, despite some growth between 2009 and 2017, the share of the US stock market owned by foreigners was still only about one-seventh in 2017. But if all people heeded financial advisers’ counsel and were completely diversified, people outside the US, who held more than two-thirds of the world’s wealth as of last year, would own over two-thirds of the US stock market as well. Home-country bias, or patriotism, is a big factor in the stock market. So, to understand the US stock market’s strength, we need to consider the thinking of its participants.

There seems to have been an overreaction in the US to a temporary drop in earnings. S&P 500 earnings per share had been negative (a very rare event) in the fourth quarter of 2008, both for “reported earnings” and for “operating earnings,” and those numbers were just coming in around March 2009, when the index reached its nadir. You might think that an intelligent observer in the US in 2009 would have recognized that the decline was temporary, and would have expected earnings – which are relevant to forecasting long-term growth of stock prices – to recover. But the real question is whether the observer could have based a very optimistic forecast for long-term earnings growth on the rebound from that negative earnings moment. We now know that long-term measures of earnings growth did not change a lot. Ten-year average S&P 500 earnings per share from 2009 to 2019 were up only 71% from the previous decade. The quadrupling in the S&P 500 price index was thus driven not by higher earnings but by much higher valuations of earnings....MUCH MORE
If anyone is curious what we were posting in March 2009 here's "Setlist, Climateer Investing Market Bottom 2009"