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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Saulamanca who wrote (73472)	3/28/2001 7:01:22 PM
From: Saulamanca	Read Replies (2) \| Respond to of 99985

03/27/01: Irrational Exuberance Analysis SUSIE GHARIB: With that stock market rally we had today and today's upbeat report on consumer confidence, are investors feeling exuberant again or is the era of irrational exuberance over? I asked that question today to Yale economics professor Robert Shiller, author of the best selling book "Irrational Exuberance." ROBERT SHILLER, ECONOMICS PROFESSOR, YALE UNIVERSITY: Well, I think that it's a complicated phenomenon. Certainly expectations and confidence in the market have diminished, though we still have a lot of people who are wedded to the belief that the stock market can only go up over an interval of five, 10 years. And so they're waiting for that to happen. GHARIB: So do you think that investors still have unreasonable expectations? SHILLER: Well, expectations are very hard to pin down. We have-it's tied with both expectations and confidence. It's also a kind of hope. People who have lost in the market are waiting for it to come back. All this contributes to demand, which means that the market is still holding up at quite high levels. GHARIB: Americans have come to view the stock market as sort of a best place as a long-term investment and even Americans who don't have money in the stock market look at it as some kind of an indicator of the national well being. Is that a good thing? SHILLER: No, it's not a good thing. We're putting too much reliance on something that is inherently risky and other alternatives like government bonds, savings bonds, are looked down on as unexciting, when they are actually promising a higher yield than the stock market does right now. GHARIB: So, what would be your advice then? SHILLER: Well, I think people should pick carefully. They shouldn't be heavily involved in the whole market because I think it has quite a downside potential still. That doesn't mean they should be completely out of stocks. Obviously some stocks are very low priced. But there are people now who are still very strongly exposed to the stock market because of this still sense of confidence and hope that it will come back. And we really shouldn't be hoping that now. GHARIB: Professor Shiller, when your book came out a year ago you were saying that there was a certain insanity to the stock market, that valuations had gotten out of whack and your advice was pretty simple, that you thought investors should get out of the stock market. That's not your view now? SHILLER: No. I think that people should not be heavily exposed to the market. It's a little bit better now. The market has come down al bit. GHARIB: Do you think the valuations are more appropriate now? SHILLER: Well, right now the S&P has a price earnings ratio of about 22 compared to a historical average of about 14. And earnings may well come down. You know, right now S&P earnings for the fourth quarter were about 10. Multiply that by four to make it annual. Multiply that by 14 and that brings you an S&P of 560. I'm not saying that's what's going to happen, but that would be, you know, by historical standards that would be a good price for it. So it's really high now. GHARIB: So you're saying then, I mean you follow stock market cycles, you follow economic cycles. What are you saying about where the Dow, the NASDAQ and the S&P should be? What's the right level? SHILLER: I never answer that question because it's really a range. The point is that people think that the market can only go up. They don't realize that in times like this, it doesn't have to go up. If you go back to the last peak of the market, I'm calling a major peak in 1968, that was the end of another long expansion like the one we've had now. And earnings, real S&P earnings did not grow for the next 25 years after that big expansion. When we have a huge expansion, things gets puffed up for a while. GHARIB: So are you saying, real quickly in a word or two, how optimistic or pessimistic are you about where the economy goes from here? SHILLER: I'm pessimistic about the stock market. I'm not so pessimistic about the economy. The economy will probably continue to move along over the long haul as it had. We'll have a recession maybe, but probably short lived. GHARIB: OK. We're going to have to leave it there. But thank you so much for joining us this evening. SHILLER: My pleasure. GHARIB: We've been speaking with professor Shiller from Yale University. nbr.com