Practical analysis for investment professionals
13 June 2017

Shiller vs. Siegel: Is the Stock Market Overvalued?

Is the stock market overvalued? That depends on who you ask.

Nobel laureate Robert J. Shiller says “yes,” while Jeremy Siegel says “no.”

When the two economists took to the stage at the 70th Annual CFA Institute Conference  in Philadelphia, Gillian Tett of the Financial Times aptly teed up the discussion on investment theory, financial valuations, markets, and the economy, saying, “We are lucky enough to hear from two important luminaries, if I dare not say lions, of the financial economic world over the last few decades.”

Indeed, Shiller and Siegel did not disappoint. After all, they have been squaring off for five decades.

Those who follow the market and financial news know that Shiller and Siegel hold two distinctly different perspectives.

In Clash of the Cape Crusaders,” John Authers noted that Shiller’s CAPE ratio, which uses earnings data stretching back to 1871, “has gained wide acceptance as an accurate gauge of the market. . . . But the Cape is under attack from another renowned economist, Jeremy Siegel, who contends that it is based on faulty data.”

When it comes to valuations, they continue to stand on opposite sides of the debate.

So, too, did many conference participants. When Tett asked delegates for a show of hands as to who thinks the US equity market is overvalued and thus lean toward Shiller’s perspective versus those who take Siegel’s view that stocks are not overvalued, the audience was evenly split.

The stock market in the US is highly priced,” said Shiller, author of Irrational Exuberance.

Siegel, the author of Stocks for the Long Run, remarked that “The low-interest rate environment we have been in — and I think will be in for many years — makes stocks still definitely the asset of choice for your portfolio.”

When Tett asked Shiller whether he is working on the assumption, like Siegel, that interest rates and inflation are going to stay low for a long time, he raised the notion of “narrative economics.”

“The fact that long rates are so low suggests that there is a general feeling that we are in for a long period of secular stagnation,” Shiller said. “There is a secular stagnation narrative. This is not science, it’s a narrative. Nobody can prove it right or wrong, but people believe it now. The last time we had this narrative was in the Great Depression.”

What about the so-called “Trump bump” in the stock market?

Siegel believes it’s the Republican agenda that sent the markets up and supports the market today, not the proposed policies of President Donald Trump.

“The market likes the Republican agenda,” Siegel said. “It’s not that they like the Trump agenda.”

Additional Content

This article originally appeared on the 70th CFA Institute Annual Conference blog. Experience the conference online through the Virtual Link. It’s an insider’s perspective with live broadcasts and recorded video archives of select sessions, exclusive speaker interviews, discussions of current topics, and updates on CFA Institute initiatives.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo courtesy of W. Scott Mitchell

About the Author(s)
Lauren Foster

Lauren Foster is managing editor of Enterprising Investor and co-lead of CFA Institute’s Women in Investment Management initiative. Previously, she worked as a freelance writer for Barron’s and the Financial Times. Prior to her freelance work, Foster spent nearly a decade on staff at the FT as a reporter and editor based in the New York bureau. Foster holds a BA in political science from the University of Cape Town, and an MS in journalism from Columbia University.

3 thoughts on “Shiller vs. Siegel: Is the Stock Market Overvalued?”

  1. FRED GUESNER says:

    As the audience is evenly split , unable to decide what is the market next direction, it just proves we are among a rational crowd , emphasizing the Efficient Market Hypothesis of Nobel Eugene Fama remains the very genuine guideline to understand markets behavior.

    All other theories are childish !

    Quoting in a certain way Robert Shiller I would consider all theories to track & predict market trends are narratives. Only EMH is a science.

  2. Fung C.F. says:

    I have great respect for both. Siegel taught us well about the long-term stock market returns, it is now serving as my first principle in equity investing; Shiller on the other hand is a very sensible economist, who incorporates behavior finance into his economic theories.

    But one problem about the CAPE ratio is that it is a rear-view mirror valuation, not forward looking, so it is more like a historical guidance than a prospective evaluation. Nevertheless, the cyclical-adjusted earnings yield (CAEY) is sitting at 3.35%, which is actually still lower than the 10-year average of 1-year treasury rate at 0.7%. CAPE valuation is high versus the history, but not versus its alternatives, e.g. interest rates. In fact, CAEY in 2000 and 2008 were lower than the average interest rates, which explained the overvaluation then.

    Hence I’m more inclined to sit in Siegel’s camp for this case, but with caution. Shiller has a point though on the secular stagnation phenomena, the trend of low growth and low inflation has been there for too long despite the enormous liquidity. A Black Swan, which by definition we have no idea what it is, is bound to happen some time soon.

    1. Fung C.F. says:

      Correction:
      “the cyclical-adjusted earnings yield (CAEY) is sitting at 3.35%, which is actually still [higher]* than the 10-year average of 1-year treasury rate at 0.7%.”

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