Nobel-winning economist Robert Shiller says low investor confidence and high prices are raising the risk of a market crash — and cautions investors not to be overweight stocks

• Robert Shiller said in a New York Times op-ed article on Friday that the coronavirus pandemic and the upcoming election had caused investors to fear a stock-market crash more than they have in years.
• The Nobel-winning economist said several of his stock-market-confidence indexes were demonstrating a low level of investor confidence while stock prices were "trading at very high levels."
• "That volatile combination doesn't mean that a crash will occur, but it suggests that the risk of one is relatively high," Shiller said.
• A rise in COVID-19 cases or a chaotic election could trigger a "change in mass psychology" and bring on a market crash, he concluded.
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The Nobel-winning economist Robert Shiller said the coronavirus crisis and the upcoming election had driven investor fears of a major stock-market crash to the highest levels in many years.

But while investor confidence in the market is low, stock prices are "trading at very high levels," he wrote in a New York Times op-ed article on Friday.

"That volatile combination doesn't mean that a crash will occur, but it suggests that the risk of one is relatively high. This is a time to be careful," the Yale economist said.

Shiller has developed several stock-market-confidence indexes over his decades-long career. He said many of them were demonstrating that investors are more nervous than ever about the stock market.

For example, he said his Crash Confidence Index, which tracks how many investors say the probability of a catastrophic market crash in the US in the next six months is less than 10%, hit a record low in August, when just 13% of investors surveyed said they had that level of confidence in the market.

In September, Shiller said, the reading "was still extremely low."

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"In short, an overwhelming majority of investors said there was a greater than 10 percent probability of an imminent crash — really, a remarkable indicator that people are quite worried," Shiller said.

Shiller said that another one of his indexes, the Valuation Confidence Index, was also near a record low, demonstrating that a large number of investors think the market is too highly priced.

The economist also said the CAPE ratio, which he helped to develop, suggested that the market looked similarly valued as periods right before the Great Depression and the dot-com bubble burst in the early 2000s.

But "the low confidence readings and the high stock prices won't, on their own, cause a market crash," Shiller said. "Another dynamic would need to be in effect."

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An increase in coronavirus cases or a chaotic election could "shake people up," he said. And any further similarities between the market now and the market before previous crashes could "create a psychological sense of the risk."

"The decision to invest in the stock market is for some people a bit of an adventure," Shiller said, adding that "the market may be vulnerable to a change in mass psychology, one that might dampen this sense of adventure and bring on a crash."

The economist told investors to diversify in asset classes and not be overexposed to US stocks to brace for the period ahead.

"No one knows the future," Shiller said, "but given the general lack of investor confidence amid a pandemic and political polarization, there is a chance that a negative, self-fulfilling prophecy will flourish."

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