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All of these valuation metrics were originally derived when actively managed mutual funds ruled the roost.
Passive ETFs are imposing an entirely different trading/investing ruleset on the system.
This should not be underestimated.
The problem with macro-economic composites is that at that level, everything is unfolding on different timescales. So around transitional moments, your end result is going to go wonky. GDP plummets -> interest rates are dropped -> GDP recovers -> interest rates are raised You're balancing between responsiveness, accuracy, and reliability: pick two. I'd have thought the last few crises would have taught us that we sho…
Can you explain the difference between accuracy and reliability in this context?
1) Philosophical Economics' stock/bond/cash preference model:
http://www.philosophicaleconomics.com/2013/12/the-single-gre...
https://financial-charts.effingapp.com/
2) John Hussmann's non-financial market cap to gross value added:
https://www.hussmanfunds.com/category/comment/
https://www.hussmanfunds.com/comment/mc210715/
But as the sibling comment and all the sources above say, those do not predict the path, only the destination (which is a decade or more in the future). It would be completely consistent with such macro valuation models if, for example, the general prices doubled or even quadrupled over the next year or two, why not. Stay safe out there :)
The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen. As Keynes famously said: "The market can stay irrational longer than you can stay solvent." An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion.…
Valuations have been stretched for almost half a decade now according to old market metrics. All of these valuation metrics were originally derived when actively managed mutual funds ruled the roost. Passive ETFs are imposing an entirely different trading/investing ruleset on the system. This should not be underestimated.
The $64 questions in today's economy are:
1. Will multiple expansion continue indefinitely, thereby enabling investors to achieve higher profits than one would expect via fundamentals alone (GDP growth, profit margins, tax rates)?
2. Is the risk in the index really so low that it makes it worth an investment, even if the return absent multiple growth is something like 3-4% a year nominal?
3. When risks do emerge, can the federal government indefinitely reward investors with lower discount rates without triggering any negative consequences?
None of these is directly tied to passive investment. In fact, I'd argue the fact that investors no longer actively track what's going on in indexed portfolios creates a benign neglect situation that is contributing to the current bubble and the risk of collapse.
My biggest concern here is that the bubble is so large that, if it collapses and the government stops being able to print money to "correct" that, even those with marketable skills and decent savings won't be able to escape the undertow of the recession/depression that follows.
The problem with these indicators is that, although they may indicate over- or undervaluation, they tell you nothing about when a mean reversion will happen. As Keynes famously said: "The market can stay irrational longer than you can stay solvent." An indicator that does a pretty good job of signaling the "when" of a recession, and by extension the likely "when" of large market corrections, is yield curve inversion.…
Neither politicians, nor your investment advisor, use such a scoped time horizon.
This doesn't take into account interest rates. Buffett himself has said recently that given the current interest rates stocks are not overvalued.
nvm, just got to the "Criticisms of The Buffett Indicator" section where they cover just this topic :)
This doesn't take into account interest rates. Buffett himself has said recently that given the current interest rates stocks are not overvalued.
We have had a 40 year bull market in bonds, but that is almost certainly coming to an end. There is just no more room for that bull to run.
Just a reminder that a larger portion of today's market value is made up from Tech stocks. Tech stocks are typically higher valuations and P/E multiples, giving a skewed data point perspective vs. 20 years ago.