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Shiller: Valuations are high, but that’s no reason to sell stocks

Shiller on valuations
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Shiller on market complacency

Equity markets may be relatively expensive, but that doesn't mean investors should do anything drastic, Yale University professor of economics Robert Shiller said in a recent interview.

"I still suspect there is more left in the Trump rally," he said Tuesday on CNBC's "Trading Nation."

Shiller is quick to acknowledge that his guarded bullishness comes despite the fact that his famous valuation gauge, the cyclically adjusted price-to-earnings (or CAPE) ratio, is at levels it surpassed only in 1929 and surrounding the dot-com bubble. Its elevated level indicates the market is "highly priced in the short run," he pointed out.

That said, valuation famously makes a poor short-term timing tool, and this is particularly true of the long-term CAPE ratio. Its level is derived by comparing the 's current level to average earnings over the prior 10 years, adjusted for inflation.

"It's already high enough to make me nervous ... the CAPE ratio is one of the best indicators, or I might say the best indicator, if you look at one alone, for the outlook in the long run for stocks. It's high now; and in the past when it's been this high, it hasn't done well," Shiller said.

He added, "I'm just playing the game a little bit here, and thinking, in the shorter run, this rally — I can start to see reasons for it, and I'm thinking about those reasons."

And while the CAPE may be at elevated levels, market sentiment is not at all reminiscent of the dot-com bubble or of the Roaring '20s.

This is "not a typical bull market with a lot of excitement," he said. "It's more of an anxious market where people are afraid of secular stagnation, of losing their jobs to foreigners, or to computers. And they have kind of a wishful-thinking bias about investments like stocks. It's the only way I can understand it."

Shiller is thus not convinced that reducing one's equity holdings is a smart play.

Amid high valuations, "I'm not going to plunge into the market. I'm holding steady; I'm not pulling out, either."

"If I was giving you advice: Do nothing. Don't pull out. Don't go in," the Nobel laureate economist said Tuesday. "I'm sounding very standard right now."