Investors increasingly feel that the market is overvalued and a financial crisis is possible, Nobel Laureate Robert Shiller told CNBC’s “Squawk Box” on Tuesday.
Shiller’s Cyclically Adjusted Price-Earnings (CAPE) ratio, which measures whether the market is fairly valued, is tied with the precrisis peak in 2007, indicating that stocks are overvalued, he said. A separate survey conducted by Shiller found that both individual and institutional investors feel the market is overpriced. Shiller said it hasn’t been this bad since 2000.
“Over the recent years, the decline in confidence in the valuation of the market has been striking,” he said.
At the same time, Shiller’s Crash Confidence Index indicates a drop in confidence among investors that we will not experience a 1929-style crash. He cautioned he wouldn’t make too much of the reading, saying the number has “wiggled around,” but overall confidence in the stability of the financial market is pointing downward.
Even with a CAPE ratio of 27—a reading above 25 indicates overvaluation—the expected return on equities is still higher than one can expect to get on real estate or fixed incomes, said Shiller. He said he wouldn’t over-invest in the market, but he wouldn’t advise getting out either.