Nobel-Prize Winning Economist Provides Support for Broken Clock Theory

John Robinson |

Are "Gut Feelings" Driving the Market?

A long-time husband and wife client called to seek my advice about reducing their stock market allocation. Their inquiry was a reaction to a January 2nd New York Times article by Yale University Professor, Robert Shiller. In the article, Shiller notes that the Cyclically Adjusted Price Earnings (C.A.P.E.) ratio - a market valuation measure that he developed – is higher than it was before the 1929 and 1999 stock market peaks. Given that his contribution of the C.A.P.E. ratio is a big part of what earned him a share of the 2013 Nobel Prize, it is understandable that readers of the article might take his foreboding words to heart.

Far be it from me, a lowly financial planner with nothing more than an undergraduate degree in econ to challenge Professor Shiller, but here is a video clip from September 2015 in which he appeared on CNBC to proclaim that the C.A.P.E. Ratio was high and that the market was overpriced. The Dow, at that time, stood at just over 16,000.

Five years later, with the Dow now just shy of 29,000, Professor Shiller is still singing exactly the same tune. At some point, the stock market will, of course, go through a period of decline. At that time, Professor Shiller will probably proclaim that he was right – just as the broken grandfather clock in my living room is occasionally right. Note to Professor Shiller – If you are more than five years early in your market timing prediction, you were wrong.

The 2013 Nobel Prize in Economic Sciences was shared between Professor Shiller and Efficient Market Hypothesis founder/creator, Professor Eugene Fama from the University of Chicago’s Booth School of Business. The sharing of the prize between Shiller and Fama caused a bit of a stir because the economists appear to have diametrically opposing views of how markets function.

While Professor Fama was gracious in accepting that there is always room for debate in economics, Shiller, in is public comments, seemed to belittle Fama’s work and scoffed at the suggestion that the stock market is efficient and unpredictable. Fama has said many times that markets may be indeed be inefficient, but not to a degree that enables investors to profit from predicting its direction. Count me squarely in the Fama camp.

Related Reading: Nobel Prize-winning economists take disagreement to a whole new level

Accountability Proves the Incompetence of Market Forecasters (Advisor Perspectives)

J.R. Robinson is the owner and founder of Financial Planning Hawaii and the co-founder of software maker, Nest Egg Guru.

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