M4 BARRON’S August 5, 2019
ble. The CAPE “is just the price over 10-
year average earnings,” Shiller explained.
It has its uses. Shiller created the Bar-
claysETN+ShillerCAPE exchange-traded
note (ticker: CAPE) in 2012 to put his re-
search to use. The ETN looks at nine sectors
and buys the four cheapest that also have the
strong momentum. As a result, investors are
purchasing cheaper sectors while avoiding
value traps that can sink a portfolio. The
ETN has returned about 14% a year, on av-
erage, over the past five years, better than
the 11.2% return of the S&P 500 and the
12.7% of the Dow Jones Industrial Average
over the same span.
Shiller might not see a bubble in U.S. eq-
uities, but that doesn’t mean he hasn’t spot-
ted them elsewhere. Bitcoin, Canadian real
estate, and marijuana stocks were three as-
sets he referenced when talking about bub-
bles. He demurred on how extended valua-
tions are, and is as fascinated by how
bubbles form as what might happen next.
Real-estate prices in Toronto have been
advancing at about 8% annually for 10 years,
according to National Bank of Canada data.
And Toronto housing affordability has deteri-
orated by about 50% since the end of the fi-
nancial crisis. Perhaps risk-averse investors
shouldn’t look for condos north of the border.
Marijuana stocks, meanwhile, are still
bubbly despite a recent pullback. The Hori-
zons Marijuana Life Science Index ex-
change-traded fund (HMMJ.Canada) is
down about 40% from its 52-week high, but
stocks in the fund still trade for about 25
times trailing sales. Stocks in the S&P 500,
in comparison, trade for about two times
trailing sales. What’s more, Canadian pot
company Aphria (APHA) gained more than
37% on Friday after sales topped analyst
expectations by 7%. Aphria stock is up 23%
year-to-date, down 13% over the past year
and trades for 9 times trailing sales. It has
VITALSIGNS
Friday's Week's Week's
Close Change %Chg.DJIndustrials 26485.01 – 707.44 – 2.60
DJTransportation 10374.43 – 402.24 – 3.73
DJUtilities 817.87 + 2.11 + 0.26
DJ65Stocks 8769.46 – 216.95 – 2.41
DJUSMarket 729.19 – 23.96 – 3.18
NYSEComp. 12839.51 – 395.99 – 2.99
NYSEAmerComp. 2463.95 – 84.35 – 3.31
S&P500 2932.05 – 93.81 – 3.10
S&PMidCap 1914.53 – 68.61 – 3.46
S&PSmallCap 938.14 – 24.37 – 2.53
Nasdaq 8004.07 – 326.14 – 3.92
ValueLine (arith.) 6103.70 – 213.76 – 3.38
Russell2000 1533.66 – 45.31 – 2.87
DJUSTSMFloat 30105.17 – 986.05 – 3.17
LastWeekWeekEarlierNYSE Advances 1,180 1,938
Declines 1,883 1,125
Unchanged 44 51
NewHighs 603 485
NewLows 250 163
AvDailyVol(mil) 4,027.5 3,340.6
Dollar
(Finexspotindex) 98.10 98.01T-Bond
(CBTnearbyfutures) 158-190 154-110CrudeOil
(NYMlightsweetcrude) 55.66 56.20InflationKR–CRB
(FuturesPriceIndex) 173.35 177.16Gold
(CMXnearbyfutures) 1445.60 1418.50Advisors technical analyst John Kolovos.
From there, though, things start to look a
lot like they did in the 1970s. Kolovos isn’t
referring to macro factors that caused wild
swings in the market—there are clearly
enormous differences between the runaway
inflation of the ’70s and the Fed’s battle to
ensure no deflation in the 2010s—but to the
market’s gyrations themselves.
In the mid-1960s, the S&P 500 began
seeing periods of higher highs and lower
lows, ultimately resulting in a massive bear
market in 1973-74. Kolovos doesn’t see the
same thing happening now, but finds the
pattern of higher highs and lower lows wor-
risome. If they were to continue, it would
mean that the S&P 500 would undercut its
December low of 2351.10—a drop of at least
22% from this year’s peak.
Is such an outcome set in stone? Hardly.
But such trading patters occur in “very
emotional market environments of wide
bullish and bearish extremes,” Kolovos says.
This could pretty much describe today.
Bubble Spotting With Shiller
When the stock market is in turmoil, it’s a
good time to step back and consider the
long term. And there may be no better per-
son to discuss the long term with than No-
bel Prize winner Robert Shiller.
The Yale University economics professor
is co-creator, with Karl Case, of the S&P/
Case-Shiller U.S. National Home Price In-
dex, as well as the cyclically adjusted price/
earnings ratio, or CAPE. In prior eras, he
warned about tech-stock and housing valua-
tions—before they collapsed.
When we sat down in his disheveled,
wood-paneled office fit for an Ivy League
icon, he didn’t seem all that nervous about
valuations. According to Shiller’s CAPE ra-
tio, stocks are expensive, but not as expen-
sive as they were during the dot-com bub-
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