Nobel Prize-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

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  • Rober Shiller said in a New York Times op-ed that the coronavirus and upcoming election have caused investors to fear a stock market crash more than they have in years. 
  • The Nobel Prize-winning economist said several of his stock market confidence indexes are demonstrating a low level of investor confidence. At the same time, stock prices are 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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Economist Robert Shiller said the coronavirus crisis and upcoming election have driven investor fears of a major stock market crash to the highest levels in many years.

Yet, while investor confidence in the market is low, stock prices are trading at very high levels, he wrote in an op-ed in The New York Times. 

“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 warned investors.

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

For example, his Crash Confidence Index, which tracks how many investors say the probability of a catastrophic stock market crash in the US in the next six months is less than 10 percent, was at a record low in August. Just 13% of investors surveyed had that level of confidence in the market. In September, the reading was still extremely low. 

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“In short, an overwhelming majority of investors said there was a greater probability of an imminent crash-really, a remarkable indicator that people are quite worried,” said Shiller.

Another one of Shiller’s indices, the Valuation Confidence Index, is also at 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 develop, suggests that the market looks similarly valued to periods right before the Great Depression and the early-2000s dot-com bubble burst. 

But Shiller said that the low confidence readings and high stock prices won’t cause a market crash on their own. “Another dynamic would need to be in effect,” he added.

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A further increase in coronavirus cases, or a chaotic election, could “shake people up,” he said. Also, any further similarities between the market now and the market before previous crashes could create a “psychological sense of the risk,” added Shiller.

“The decision to invest in the stock market is for some people a bit of an adventure,” Shiller said. “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, but given the lack of investor confidence amid a pandemic and political polarization, there is a chance that a negative, self-fulfilling prophecy will flourish,” said Shiller.

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