Robert Shiller’s Latest Prediction – Is a Market Crash in Our Near Future?

Most recently a Sterling Professor of Economics at Yale, Robert Shiller, continues to make bold predictions of the markets, causing many to second guess their portfolios. His strong and lengthy background as a Nobel Prize winning economist and best-selling author ensures extra worry with his latest prediction for 2015.

What’s To Come in The Markets for 2015
If you’re a bond investor, listen up. According to Shiller we have too much invested in stocks and bonds which may cause stock and bond prices to skyrocket, ultimately leading to an inevitable crash. Comparing cyclically adjusted price-earnings (CAPE) ratio in 1929, 2000, and 2008, Shiller analyzes today’s similar high cost and low value. The CAPE ratio is one of Shiller’s most favorite and used measurements for predictions and compares the current prices of the past 10 years of earnings.

As the CAPE ratio developer, Shiller created this measurement from analyzing the S&P 500 Index from 1871 to present day, taking an average of every ten years of earnings and adjusting for inflation. The higher than average CAPE means a lower than average long-term annual return. Shiller used this data to define a mean ratio of 16.47 and a median of 15.88. Here is the last ten years of the CAPE ration*, where you will notice the large drop from 2008’s recession to 2009.

  • January 2003           22.89
  • January 2004           27.65
  • January 2005           26.58
  • January 2006           26.46
  • January 2007           27.2
  • January 2008           24.01
  • January 2009           15.17
  • January 2010           20.52
  • January 2011           22.97
  • January 2012           21.21
  • January 2013           21.9

*Source: Caperatio.com

So Is This the Beginning of the End?
Just as he predicted the crash that happened in 2008 a year prior, which the CAPE ratio reflects, Shiller is now predicting in his third edition of “Irrational Exuberance,” another crash may soon be hitting the markets.

In 2006, Shiller announced a warning in The Wall Street Journal that foreclosures, large drops in sales, and even smaller commissions were in the near future. Almost an exact year prior to the recession of 08’, Shiller published another article stating the American housing market was going to collapse. About a year later it did.

How Can You Prepare For Another Market Crash?
Diversify! Investing in multiple markets, even foreign markets will help secure your savings and overall investments, especially in case of catastrophic market crashes. Diversification helps reduce large risks and allows one to profit in several different markets.

One of Shiller’s most recommended investments for Americans is to invest outside of the United States in countries like Europe. Though some Americans frown upon the thought, the crash predicting Nobel Prize winner recommends it may save your investments.

Should We Listen?
The types of returns we once received from assets may be no more and in order to continue profiting, we must look to an alternative investment strategy. Along with diversification, Shiller offers the same advice we’ve heard from our father’s fathers – save your money.

Due to an increase in life expectancy, people are living much longer than the usual post-retirement. Instead of saving for a decade or two-post retirement, men and women are living up to thirty years after retirement without planning for it properly. Saving now not only will help you in the future but can survive you through any market crash.

Whether or not Shiller’s most recent market crash prediction is correct, diversification, saving and constant awareness of market trends is vital to investment survival.

Source: Yahoo Finance

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