There's still risk of a full-blown bear market, says Robert Shiller

The Nobel Prize winner for Economics in 2013 for his work on asset prices and inefficient markets, said he doesn't pay much attention to fundamentals driving markets but was "more interested in psychology" and popular "narratives."

Earlier, Shiller had told CNBC that the 1920-21 Depression, the Great Depression of the 1930s and the Great Recession of 2007-09 were largely driven by narratives.

Shiller explained how there was a narrative that began at the beginning of 2018, following which there was correction and 10 percent decline in January and February. There was another downturn between September and Christmas Eve last year, and on the S&P 500 it went down from peak to trough 19.8 percent, almost making it to the classical definition of a bear market, he added.

The term 'bear market' on Wall Street means a sharp, long-lasting decline in share prices of stocks. In numeric terms, a bear market is a 20 percent or more drop from a recent peak.

On December 24, 2018, the S&P 500 hit that milestone after dropping 20 percent from its 52-week high. However, it was on an intra-day basis and not when taking into account closing prices for the index. Since the start of the year, S&P 500 has risen around 5 percent.

His view that such narratives weigh on people's mind, however, differs with experts who believe fundamentals drive the market.

"I have this quarrel with economists about fundamentals, I'm writing a book on 'narrative economics' and think it's stories that drive markets more than fundamentals," Shiller said.

Shiller's remarks come amid wider uncertainty over how the market may react to rising interest rates from the US Federal Reserve and geopolitical tensions, especially between the US and China.

Last year, the Fed signaled at two increases in 2019. However, market watchers have told CNBC that there's a risk that markets are not pricing in the prospect of rate hikes at all this year.

Earlier, President Donald Trump had criticised the Fed for increasing rates too fast.

According to Shiller, the Fed is seen as one of the fundamentals driving the market down but he said "the Fed is people trying to stabilise markets". Shiller sees the Fed as being "kind of predictable and mild ever since (former Fed Chair) Janet Yellen."

Commenting on the continuing partial shutdown of the US government over a row between US President Donald Trump and Democrats in Congress, Shiller said the impasse represented wider fractures in the US, which could add to volatility in markets.

"The shutdown is an existential angst I think. It is a living testament to the polarization that we see in the US today and it makes people nervous. It doesn't have any obvious impact on the direction of the market but I think it creates an anxiety level that makes the market more vulnerable to volatility," Shiller said.