Shiller: Economy in ‘Worst Shape Since Great Depression’

Many fund managers and stock market historians are claiming that the stock market will not see any significant improvement for possibly up to a decade and that the US economy is in the worst economic shape sine the Great Depression.

Thursday, 19 May 2011 04:08 PM
By Greg Brown

Is the stock market about to take a 10-year nap? That’s the warning coming from fund managers and stock market historians, including Yale University professor and housing guru Robert Shiller.

Shiller sees stocks gaining between 2 percent and 3 percent during the coming decade. He sees no reason to believe in a resurgence of consumer spending, considering that the real unemployment rate, by his calculation, is 15.9 percent, and housing is headed south again.

“Even at this point, with the recession technically over, we are in the worst financial shape we've been in since the Great Depression,” he told an audience in Las Vegas, reported

Shiller’s unemployment figure counts unemployed, underemployed, and people forced into early retirement by the economy.

On top of all that, consumer confidence is weak and the foreclosure crisis continues to spread, Shiller notes.

“It worries me because if people don't have confidence, they don't spend money,” said the professor, who is best known for the widely cited S&P/Case-Shiller Home Price indexes.

The foreclosure rate fell slightly in the first quarter from a record high, according to the Mortgage Bankers Association, to 4.52 percent from 4.64 percent in the previous quarter. New foreclosure also slipped, to 1.08 percent of all loans from 1.26 percent. Delinquent loans also fell a half a percentage point, to 8.1 percent.

Roughly 6.4 million home loans are delinquent or in foreclosure, reports Bloomberg News, while the median home sale price has fallen by 5 percent in a year, to $163,700.

Of course, the idea that stocks might stay weak for years doesn’t mean that equities will return anything near an even, if low, percentage gain, nor does it take into account the effects of inflation, which could easily supersede such low gains and result in a negative return.

In fact, a study by Fidelity Investments found that stocks can put on double-digit increases over the months before a short, sharp correction.

Looking at stocks from 1928 through 2010, the median correction was negative 12 percent over a median time period of 54 days, but that correction came after a median gain of 57 percent in mini bull markets that lasted 1.5 years in length.

In the maximum case, stocks put on 233 percent before correcting and in the minimum case still gained 21 percent, compared to a maximum loss of negative 19 percent in a correction.

Investors got a similar warning from fund manager John Hussman earlier this week, who called stocks “strenuously overvalued” and warned of similarly low returns over the coming 10 years — just 3.5 percent for the S&P 500.

“A series of market fluctuations -40%, +85%, -36% and +100% within a 10-year period would produce a 10-year return about 3.5% annually, so a poor long-term expectation doesn't rule out the likelihood of significant investment opportunities in the interim,” Hussman wrote to investors.

“The real difficulty at present is that at already elevated valuations, it's less likely that those opportunities will be front-loaded.”

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