Shiller's Prediction on the S&P, Ten Years After
My reader may get tired of the repeated references to Burton Malkiel, Jeremy Siegel, and Robert Shiller, but reading each of these guys fills the foul rag and bone shop of my heart with exuberance, sometimes even the rational kind.
Tonight's tale of Shiller comes from a January 14 story in India's Economic Times wherein J. Bradford Delong revisits Shiller's 1996 prediction that the S&P 500 would be a stinker for returns for the decade to come.
Shiller’s arguments were compelling. They persuaded Alan Greenspan to give his famous “irrational exuberance” speech at the American Enterprise Institute in December 1996. They certainly convinced me, too.But Shiller was wrong. Unless the American stock market collapses before the end of January, the past decade will have seen it offer returns that are slightly higher than the historical averages — and much, much greater than zero. Those who invested and reinvested their money in America’s stock market over the past decade have nearly doubled it, even after taking account of inflation.
Not that Shiller's work is discredited by this failure to predict positive, if substandard, returns, as DeLong is good enough to note; but it's fun to see a guy who has the habit of denouncing the theories and ideas of even some of his most reasonable colleagues as "the greatest disaster in the history of finance," (Shiller's CNBC-ready take on both Burton Malkiel's terrific A Random Walk Down Wall Street and the Glassman/Hassett stinker Dow 36,000) get held to account for some of his own predictions.
What is Shiller saying now? He's still saying the US stock market is overvalued, on the basis of a price-to-earnings ratio for the S&P 500 that uses 10-year trailing "smoothed" earnings as its denominator (he justifies his use of this rather arcane P/E by claiming that Benjamin Graham used such a denominator - not too terribly scientific, but okay, Bob, economics isn't too terribly scientific either). And he's still warning of consequences of inflated real estate prices that he highlighted in the second edition of his enjoyable Irrational Exuberance.