“Stock prices have reached what looks like a permanently high plateau.”
Yale economist Irving Fisher, 1929
U.S. stock valuations haven’t been this extreme since 1929 and 2000
51–60 of 83 posts
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#52At the market level, stock returns only come from 4 things: dividend yield, real earnings growth, inflation, P/E expansion/contraction.
Looking at 10yr+ returns, the dividends and real earnings growth are likely to be relatively stable. The big wild card is P/E expansion/contraction. Dividend yield + real earnings growth gives us a baseline real return of around 3.6%.
A 30% PE contraction over the next 10 years would bring that return down to 0% and would still leave the PE at historically high levels. A return to historical valuation levels would mean a negative return in the neighbourhood of -3% annually.
Of course, it is also possible for PE to expand another 30% over the next decade causing stocks to deliver great returns.
Which scenario the world follows is more due to sentiment than economic performance which is why it is not predictable. Although there is certainly a probability bias towards the downside
With that said, valuation levels tell you a tremendous amount about risk levels, which are VERY high right now. Which might inform you to lower your stock exposure if you can't handle a large drop in pricing (either due to not being able to sleep at night or the effect it would have on your lifestyle).
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#53We are long overdue for a correction. Put your money into bonds and buy into the fire sales in inevitable upcoming crash.
Bonds are like the biggest bubble! With interest rates being so low they have almost nowhere to go but up in interest meaning today's bonds will lose incrediable amounts of value. If you're going to buy bonds the should be rather short term and at today's interest rates and low inflation you could also hold cash. For that reason I'm mainly in stocks with a some bonds and cash.
"They have almost nowhere to go but up" has been being said by people for many years now when it comes to interest rates. It's a leading statement that somehow implies that rates are destined to go up because they are so low.
This isn't true. They have a few places they could go. They could go up. They could go down (ZIRP is a thing.) Or they could do what they've been stubbornly doing for a long time now, wobble around basically within the same range.
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#54Earlier quoted context omitted.
I'm sorry but that's just awful advice. Just because you don't have control over something doesn't mean you can't foresee it and take appropriate action to protect yourself in advance.
You cannot time the stock market. Trying to predict a crash and taking money out in an attempt to avoid losses is a recipe for disaster. For individual investors who use the stock market for their retirement funds, the appropriate action to protect oneself from the fluctuations of the market, including crashes, is to have the appropriate retirement target set, along with the proper level of acceptable risk (which aut…
There is a way on how to time a recession, that is able to indicate it right before it happens, see:
http://www.philosophicaleconomics.com/2016/02/uetrend/
And it is also possible to have a slightly better ROI than buy and hold, even if you don't have the timing of future recession dates. See http://www.philosophicaleconomics.com/2016/01/gtt/
In that last article, you also see that "perfect recession timing" (looking backwards instead of to the future) actually doesn't have that much improvement over buy and hold. So for me, it doesn't seem like the return is worth the effort, so I just buy and hold.
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#55Earlier quoted context omitted.
China just opened up outside investment this week. Chinese capital already owns way more of America through various investment vehicles than we are willing to admit. We abdicated our global leadership to China the day Trump was elected. Our economic leadership will likely follow in the next decade.
China's economy is highly dependent on Western consumption of their goods. If the US went into recession, and Americans significantly cut back on their consumption, which many of them certainly could afford to without going into poverty, wouldn't that wreck China's economy?
>China's economy is highly dependent on Western consumption of their goods. If the US went into recession, and Americans significantly cut back on their consumption, which many of them certainly could afford to without going into poverty, wouldn't that wreck China's economy?
No, they will manipulate their currency or adjust prices so that more people from China and India buy that stuff. Adding a few hundred million consumers will not be that difficult with those measures.
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#56This article felt more like an ad for active money management (and ignoring index funds) than anything else. Which makes sense. It's driving active managers nuts the techtonic shift to passive investing. This was a good podcast on active vs passive investing: http://freakonomics.com/podcast/stupidest-money/
Yep, the opening claiming leaving your money in an index fund amounts to "speculation" seemed bizarrely backwards to me. So trying to pick winners and losers isn't speculation, it's investing, but investing in a balanced portfolio spreading risk over the long term is? The latter is only speculating that over the long term, there'll be more winners than losers in your portfolio. The former relies on making individuali…
That's not what they claim though. They claim that significant exposure to US stocks, especially via indexes, right _at this moment_ looks risky since the entire US market is overheated and it requires an active investor to find any reasonable deals, if there are any left.
At the same time, they could be both wrong about overheated part, and lobbying to get some active investing fees, sure, but if you do take the viewpoint of the currently overpriced market, then the speculation claim doesn't seem too bizarre.
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#57If you're working a job that isn't directly related to the stock market, and are not about to retire, then you really shouldn't care if the stock market is about to crash or not. Set up automatic investments into a Vanguard Target Retirement fund (or whatever), and know that whenever the next crash does come, you'll get an exceptionally good deal that month. Here's some good advice on the subject: http://www.mrmoneym…
It is not so cut and dry. Here are different scenarios:
1. Public companies - They are driven by the need to enhance "shareholder value" and stock prices. In case of stock market crash, they will go back to the drawing table, re-assess their spending and cut a lot of projects, anything they deem to be not "critical". It can range from a cutting edge project, for which they don't see a pay off real soon to mundane stuff like support.
2. Startups - There are not many out there which are consistently profitable. Some of them need influx of money to keep running. A crash will cause a severe cash crunch.
3. Private Companies - Some of them might have their customers/suppliers being affected a lot.
Unlike what people like to believe stock market crash is not only about stocks. It affects a lot of things. Major one of them being money supply. Many people rely on Overdrafts or current accounts, I am not sure if that is what they are called in US, to run businesses. After crash businesses are put in a lot of pressure to up keep their accounts and run near real time cash business, something which affects a lot of things.
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#58Earlier quoted context omitted.
I'm sorry but that's just awful advice. Just because you don't have control over something doesn't mean you can't foresee it and take appropriate action to protect yourself in advance.
You cannot time the stock market. Trying to predict a crash and taking money out in an attempt to avoid losses is a recipe for disaster. For individual investors who use the stock market for their retirement funds, the appropriate action to protect oneself from the fluctuations of the market, including crashes, is to have the appropriate retirement target set, along with the proper level of acceptable risk (which aut…
>have the appropriate retirement target set, along with the proper level of acceptable risk
You make that sound so easy. It's not. None of the maths of retirement planning is hard - but the actual decisions really kind of are.
For example, I've got 10% in corporate debt. Is that more or less risky than Equity? What's the distribution? What's the correlation? How does it compare with Reinsurance, or Property? Is property strongly correlated with the stock market at the tails, or is it a diversifying asset class? Does my passive fund hedge currency risk? Do I want it to? Is private equity a good or a bad idea? Do I want FTSE ALL or FTSE 100?
How about looking at risk appetite. What is the most time it could take for my retirement savings to recover to inflation adjusted parity after a crash (I feel like 15 years is the historical max, but it's a vague memory). Should I look at risk in terms of retirement income or retirement date? Do I expect Annuity rates to improve (e interest rates to go up) or should I mark to current rates for planning purposes.
I think about the amount of context that trustees for DB pension schemes needed to make investment decisions that were sound, and I can't help but wonder how we've ended up with individuals making these decisions on their own. I've long felt that outside of fees Diversified Growth Funds (Multi Asset Funds?) are a pretty good place to "inactively" manage retirement savings. After fees I'm less convinced. I suspect the Australian model might be closest to what I internally model as best?
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#59Earlier quoted context omitted.
I'm sorry but that's just awful advice. Just because you don't have control over something doesn't mean you can't foresee it and take appropriate action to protect yourself in advance.
You cannot time the stock market. Trying to predict a crash and taking money out in an attempt to avoid losses is a recipe for disaster. For individual investors who use the stock market for their retirement funds, the appropriate action to protect oneself from the fluctuations of the market, including crashes, is to have the appropriate retirement target set, along with the proper level of acceptable risk (which aut…
Please read the above advice! In 2008, I saw the crash coming. I got tipped off, kind of: My bank was NetBank and it was the first one to fail. I pulled all my money out of stocks and sat out the crash. Brilliant, right? Yeah, except in 2010, I didn't re-invest it! I sat on a lot of cash and missed out on tons of gains. So while I preserved my wealth (and that was dicey because Money Markets nearly collapsed and that's where all my "cash" was). Had I stayed invested I would have taken some paper losses but I would have come out further ahead by now.
My one concern is that these markets are just pretend bs because of QE and the effects money printing has had on all assets.
Re: U.S. stock valuations haven’t been this extreme since 1929 and 2000
#60Earlier quoted context omitted.
You cannot time the stock market. Trying to predict a crash and taking money out in an attempt to avoid losses is a recipe for disaster. For individual investors who use the stock market for their retirement funds, the appropriate action to protect oneself from the fluctuations of the market, including crashes, is to have the appropriate retirement target set, along with the proper level of acceptable risk (which aut…
>have the appropriate retirement target set, along with the proper level of acceptable risk You make that sound so easy . It's not. None of the maths of retirement planning is hard - but the actual decisions really kind of are. For example, I've got 10% in corporate debt. Is that more or less risky than Equity? What's the distribution? What's the correlation? How does it compare with Reinsurance, or Property? Is prop…
If it's any consolation, 2008/9 proved that everything is pretty much correlated--stocks went down, bonds went down, everything went down. There were no safe havens except for massive government bailouts. To this day, the illegal acts that banks undertook to stay afloat have not been prosecuted (moving all unperforming assets to "off balance sheet vehicles" like holding companies). Also, mark-to-market accounting was suspended and has never been reinstated.