Robert Shiller announced his CAPE ratio on twitter last week. I mentioned it in a post earlier this week. I won’t post his quote again, so jump over to check it out. In it, he compares today’s CAPE level with the previous high of 2007.
It doesn’t take much to over think it, put two and two together, and see another crash as a foregone conclusion. The reference of ’07 makes that connection. Though, to be fair, Shiller is simply stating a fact, not making a prediction. But my first thought was – what role did the high CAPE in ’07 play in the resulting crisis?
We all know what happened after 2007. The market peeked, then the financial crisis hit in ’08, the market crashed, and worked it’s way out to today’s all time highs. But did the market highs in 2007 cause those series of events? Shiller certainly hints at it. Let’s not forget the housing and credit crisis.
The credit markets seized up in 2008, caused a panic in bank stocks, spilled over to other financial stocks, and finally the rest of the market. The market high was a coincidence. The overvaluation made the fall much worse. You’re welcome to take it a step further to find the cause of the credit crunch. I won’t waste pixels on all the blame tossed around for that.
Now, the market would have corrected eventually. There’s no way to say how drastic or subdued that correction would have been, because the catalyst, the credit crisis, pushed that button earlier.
When the market corrects itself next time, because there will be a next time, some cause will get that ball rolling too. We won’t know the trigger or the result till it happens or how calm or crazy it will be. But it won’t happen just because stock prices are high.
- Why Is The Dollar Sign A Letter S? – Observation Deck
- The Biggest Threat To Your Portfolio – Reformed Broker
- Jack Bogle’s Success Principles to Live By – CNBC
- Investors: Financial Leverage is Your Friend, Seriously – C. Asness
- Just Leave it Alone – M. Housel
- Woe Betide the Value Investor – Research Affiliates
- Think Twice Before You Give Up on Foreign Stocks – GersteinFisher
- Don’t Be Dogmatic About Retirement-Portfolio Withdrawals – Morningstar
- Stuff: When Less Is More – HBR
- Credit Suisse Global Investment Returns Yearbook 2015 (PDF) – Credit Suisse