Stocks look dangerously close to a bear market, but that doesn't mean it's time to sell everything, according to the Nobel-winning author Robert Shiller.
In a post on Project Syndicate Thursday, Shiller said the cyclically adjusted price-to-earnings ratio he helped develop was useful in predicting returns over the next decade. The gauge values stocks based on the past 10 years of earnings to smooth out periods when growth or weakness was abnormal.
In the peak months before bear markets — widely defined as declines of 20% or more — the CAPE ratio was above its average of 22.1. On Friday, it was slightly above 30.
The market's inactivity is also a reason to be wary, Shiller said. Stock-price volatility was lower than average in the year leading up to the peak month before all of the last 13 bear markets, Shiller wrote. It's currently lower than the 3.1% average for the time frame including those bear markets.
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Does this mean that a bear market is imminent? Shiller says no.