(Mark Lennihan/AP) Robert Shiller.
In an interview with the Financial Times, Shiller explains that what worries him about this chart is that the drop in investor confidence corresponds with an increase in the valuation and overall index level of the market.
Said another way, investors keep buying stocks even though they don't really think stocks are, on balance, a good deal. It is, then, something closer to fear than optimism that is fueling the rally in stocks.
This is a similar pattern to what happened for years ahead of the popping of the tech bubble, which Shiller nailed when his book "Irrational Exuberance" was first published right at the bubble's peak in 2000.
And in multiple interviews this year Shiller has said there is a "bubble element" to what we're seeing in the stock market while reiterating his call that this stock market rally is a "new normal boom" that is more or less devoid of optimism about the future.
Beyond the confidence index, Shiller is perhaps best known for his CAPE, or cyclically adjusted price-to-earnings ratio, which measures inflation-adjusted earnings over a 10-year rolling period.
The idea behind this measure is to give investors a longer-term view on whether stock prices are cheap, fairly valued, or expensive relative to history. Shiller added in his comments to the FT that he found this measure "substantially predicts" stock returns over the next decade.
And right now, the Shiller CAPE ratio makes stocks look pretty expensive, meaning returns will probably be pretty crappy going forward. So at least we have that to look forward to.
By Myles Udland of Business Insider
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