Thursday, April 20, 2000

Bear Market on the Way, Prof Predicts

     By Edward J. Crowder, Register Staff

NEW HAVEN — Think last week's stock market rout was bad?
     It's just the beginning, according to Robert Shiller, Yale University's Stanley B. Resor professor of economics.
     In his new book, "Irrational Exuberance," Shiller warns that in stock prices have become swollen on optimism and speculation
     When reality strikes, he said, it's likely to come as a nightmare to a nation that increasingly leans on the stock market to provide for retirement, education and other important goals.
     Ever the contrarian, Shiller predicts the Dow Jones industrial average could fall as low as 6,000 by 2005.
     "You can expect substantially to lose money (on the stock market) over the next five to 10 years, because the market is overpriced," said Shiller, who was plugging the book at Barnes & Noble's The Yale Bookstore. About a dozen people attended.
     In "Irrational Exuberance," the 54-year-old New Haven resident cautions that the remarkable surge in stock prices over the past few years has not been matched by a remarkable surge in corporate earnings.
     The average stock on the Standard & Poor's 500 index now trades at 30 times its annual earnings, compared with a price-earnings ratio of about 4 in 1920.
     Nonetheless, investors keep bidding up the prices of stocks in companies that aren't becoming that much more profitable, he said.
     The only time in U.S. history when that has happened to the current extent was during the economic boom in the Roaring '20s, from 1924 to 1929.
     "You know what happened after that," he said, referring to the Great Depression, which got under way after a painful stock market crash on Oct. 29, 1929.
     Psychology's partly to blame, Shiller said.
     Investors tend to throw money into a surging market and to sell out of a falling one. As the media hypes bull or bear markets, investors get caught in a "feedback loop," Shiller said.
     The current 10-year bull market with doub1e-digit average annua1 returns — and the media hype that has accompanied it — has raised investors' expectations to unrealistic levels, he said.
     The advent of Internet stocks that offer the (possibly empty) promise of immense returns an modest investments has fueled the specu1ation, he said.
     'Things have gotten even more dramatic with tech stocks," he said.
     The book takes its name from a pointed question posed by Federal Reserve Chairman Alan Greenspan. He asked, "How do we know if the stock market is showing irrational exuberance?"
     Stock markets around the world dropped the day after he said that.
     "This book is trying to answer that question," Shiller said.
     He has largely opted out of the stock market. Stocks comprise less than 5 percent of his portfolio, he said. Bonds and real estate make up the rest.
     His bearish position puts him at odds with many colleagues.
     Roger Ibbotson, professor of finance at Yale, said he shares Shiller's opinion that some stocks have become overvalued and that certain sectors of the market have fallen prey to "a certain amount of euphoria."
     "I wouldn't say it describes the whole market," said Ibbotson, who predicts the Dow could hit 100,000 within 25 years.
     But Peter G. Curtis, a Hamden resident who attended the book promotion; said he shares Shiller's pessimism.
     "He is talking about prudence — and people are doing imprudent things in the market today," said Curtis, a financial consultant from Hamden.