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Robert Shiller Explains What Keeps Him Up At Night

Robert Shiller Explains What Keeps Him Up At Night

Robert Shiller, the famed Nobel laureate and economics professor at Yale University, has some alarming facts about the stock market that cause him to "lie awake worrying."

The stock market's low volatility coupled with a questionable price to earnings ratio for stocks could result in a notable selloff, he explained during a recent CNBC "Trading Nation" segment. Specifically, 78 percent of earnings (as of Wednesday) have come in above of estimates, 15 percent matched expectations and just 8 percent fell below what analysts were modeling.

The problem is from a historical point of view earnings "have been trend-reverting," he added. If earnings do reverse its trend then the stock market's over-valuation implies a "major correction" would be ahead.

"We are at a high valuation," he said. "The only time we've had a higher valuation than where we are now was around 1929 and around 2000."

Meanwhile, the Shiller PE Ratio, also known as CAPE and measures the price-earnings ratio based on an average inflation-adjusted earnings over the past decade, now stands over 30. The only time it has been near these level is just before the Great Depression in the 1920s and mid-1997 through mid-2001.

Finally, the stock market's unusually low level of volatility could mark the "quiet before the storm."

But Shiller, known for accurately predicting the dot-com bubble and housing bubble, did acknowledge that his outlook for stocks isn't a forecast, rather just a "worry."

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Image Credit: By w:en:Presidential Office Building, Taiwan -, CC BY 2.0, via Wikimedia Commons


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