Robert Shiller: This would make me worried about a stock market …

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Robert Shiller isn’t ready to call the stock market a bubble. In an interview with Goldman Sachs published over the weekend, the Yale professor and Nobel Laureate said there is a “bubble element” to the behavior we’re seeing in the stock market. 

But outside of the “social epidemic” Shiller — who published his famous book “Irrational Exuberance” right before the Nasdaq peak in 2000 — looks for when identifying a bubble in the stock market, there is one thing that would make him quite worried about stocks: a loss of confidence. 

Shiller, who is often polling individual and institutional investors about the stock market, said a question he’s asked a lot lately is, “Do you think the stock market is overvalued, undervalued, or about right?”

“Lately,” Shiller told Goldman Sachs, “what I call ‘valuation confidence’ captured by this question has been on a downward trend, and for individual investors recently reached its lowest point since the stock market peak in 2000. The fact that people don’t believe in the valuation of the market is a source of concern and might be a symptom of a bubble, though I don’t know that we have enough data to provide it is a bubble.”

And so looking at markets from a valuation standpoint, Shiller’s preferred measure shows stocks are about as expensive as they’ve ever been outside of the Nasdaq bubble.

But markets don’t just reflect calculations from investors, but also their beliefs and confidence about stocks and their future. And so while investors likely don’t want to see earnings decline, a loss of faith in the market could be just as worrying. 

Goldman Sachs/Robert Shiller

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Robert Shiller: This would make me worried about a stock market …