Stocks are looking effervescent, Shiller warns
Is the stock market in a bubble? If not, it's awfully close to one, Robert Shiller argues.
"We have been in an up market since 2009, and it's been quite dramatic," he said on Tuesday's "Futures Now." And as the market rose, "it brought more and more people to regret that they didn't get in in 2009," he added. "So yes, it does have aspects of a bubble."
But what is a bubble, exactly? In the second edition of his book "Irrational Exuberance," the economist defines "speculative bubble" as "a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increase."
A professor of finance at Yale, Shiller believes that this could accurately describe the current state of things. With its precipitous rise, the market has "certainly generated stories that are optimistic," he said.
Will rising rates end the bubble?
"That's what jumps out, because rates have risen rapidly," Shiller said. "Although the fact is that, usually, bubbles burst on their own. It's like it goes too far, gets overextended and bursts. And it's not usually due to higher rates, or anything you can pin your explanation on."
The biggest problem with Shiller's forecast is timing.
"You never know when these things will come to an end," he said. "I think [the stock market] is highly priced," but "this reminds me of 1996, when I testified before the Board of Governors, and people faulted me then for calling it a bubble, because it lasted for another three and a half years."
But eventually, the market took a serious dive. And if Shiller is right about the psychological state of the market right now, that's exactly what could happen again.