The Yale economist used his cyclically adjusted price-earnings (or CAPE) ratio to determine valuation — noting that it is at a high level now and shows that the U.S. stock market is the world’s most expensive.
Shiller, who wrote about the loss of healthy skepticism by investors in a recent MarketWatch op-ed, said investors have a tendency to overreact to earnings.
“Investors believe that this boom is going to last, or at least that other investors think it should last, which is why they are bidding up stock prices in a dramatic response to the earnings increase,” he wrote.
However, earnings are volatile, Shiller told CNBC.
And while earnings growth has been going on long before President Donald Trump was elected, markets are driven by a narrative, he added.
“Right now, it is kind of a Trump narrative that’s supporting our faith in these earnings numbers, even though you know historically strong earnings growth has generally been reversed before too long.”
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