Valuation Guru Says Dow Should Be Trading at 11,000

It could get even worse though
Valuation Guru Says Dow Should Be Trading at 11,000
NEW YORK, NY - SEPTEMBER 01: Traders work on the floor of the New York Stock Exchange on September 1, 2015 in New York City. Despite positive gains yesterday, the Dow Jones industrial average resumed its fall on Tuesday over uncertainty in the Chinese economy and a looming decision over interest rate hikes. The Dow was down over 450 points at the close. Photo by Spencer Platt/Getty Images
Valentin Schmid
Updated:

Most people who wrote books about the stock market around the year 2000 titled them something like “Dow 40,000.”

Not so Yale professor Robert Shiller. He wrote a book called “Irrational Exuberance,” which came out in March of 2000, said the market was grossly overvalued and will decline and only missed the top in the Nasdaq Composite index by five days.

When asked about the current market valuation by CNBC, Shiller said the Dow Jones could drop to 11,000 and the S&P 500 to 1,300 if markets were to revert to the average of his long-term Cyclically Adjusted Price Earnings Ratio.

“The CAPE ratio is still at 25, it’s high. The ordinary price earnings ratio is misleading because earnings can drop precipitously during a recession and they are volatile from year to year,” Shiller told CNBC. The CAPE takes the 10 year rolling average of company earnings and adjusts them for producer price inflation.  

The ratio reached a high of 44 in early 2000 but also marked important tops in 2007 and in the bear market of 1960.

“The market is high now. … The recent turmoil is making many people think and see whether there exposure to the market is right. Some people are surely overexposed and ought to reconsider,” said Shiller.

The Shiller PE ratio or CAPE. (<a href="http://www.multpl.com/shiller-pe/">Multpl.com</a>)
The Shiller PE ratio or CAPE. Multpl.com
Valentin Schmid
Valentin Schmid
Author
Valentin Schmid is a former business editor for the Epoch Times. His areas of expertise include global macroeconomic trends and financial markets, China, and Bitcoin. Before joining the paper in 2012, he worked as a portfolio manager for BNP Paribas in Amsterdam, London, Paris, and Hong Kong.
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