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John Hussman calls this market "the most broadly overvalued moment in market history.”
Hussman is a permabear. He has argued that stocks will imminently crash for decades. He's almost always wrong, but every now and then the blind squirrel does find an acorn. I like to read his stuff on about a 3 year lag and just laugh at how wrong he has turned out.
And when people look at measures of stock market valuation, you kind of have to compare it to other available investments and what the expected return on those is. David Merkel estimates the next 10 years that domestic equities will return about 5-5.5% per year with objective data that has been a fairly good predictor in the past. Is that great? Of course not, but the question is what kind of realistic return are you going to see in other alternative investments.
It's risk vs reward. Right now the risk exceeds the reward based on historical equity valuations. This means the prudent thing to do is simply re-allocate an extra 10% to cash. Rule number 1: Never lose money.
Nobody can say when the next Bear market or pullback will occur. But, looking at risk vs reward Rule number 1 seems pretty wise to me.
Rule number 1 is about as wrong as you can get and Warren Buffett surely doesn't mean it. You can't make money without being willing to lose some also. Every single dollar you have allocated to equities could crash 25-50% in a 18-24 month span. So the only way to "never lose money" is to never buy stock which is plainly wrong. But it's only a loss if you sell when they are down. Personally I continue to buy equities even now (my automatic investments at 401K don't change one bit) although I do have to work harder to find individual stocks to buy in my taxable account and so I slowly accumulate a little larger cash position there as I regularly contribute to it but don't regularly buy.
I'll maintain that if you don't need the money for 20+ years, every dollar invested in stocks right now will turn out just fine for you in the end if you can successfully avoid panic selling during corrections.
-Expected returns are based on current valuations, expected economic growth, and mean reversion.
-What's expected is not necessarily what you get.
-There is a wide dispersion of returns around what's expected.
-5-6% nominal (before inflation, expenses, taxes) for the US is about the consensus of most forecasting models. Emerging Markets and Developed International are higher.
-One more time: what is expected is not necessarily what you get. If it was, there would be no risk.
Currently 10 year US Treasury yields 2.4%. 30 year 3.0%
If it was certain, or even virtually certain that stocks would beat them over those time periods, Why would anybody buy Treasurys?
Answer: Because there is a very real risk that they won't.
Hussman is a permabear. He has argued that stocks will imminently crash for decades. He's almost always wrong, but every now and then the blind squirrel does find an acorn. I like to read his stuff on about a 3 year lag and just laugh at how wrong he has turned out.
And when people look at measures of stock market valuation, you kind of have to compare it to other available investments and what the expected return on those is. David Merkel estimates the next 10 years that domestic equities will return about 5-5.5% per year with objective data that has been a fairly good predictor in the past. Is that great? Of course not, but the question is what kind of realistic return are you going to see in other alternative investments.
He has argued that stocks will imminently crash for decades.
However, what would have to happen - if anything - for you to say, "ya know what? The market looks way expensive right now. I think I will allocate my assets to another class for the time being."
Because David Merkel (from your article) indicates he is telling his investors to move to bonds right now. He also said he isn't ready to hit the panic button yet - but I take that to mean his hand is moving next to it.
SO Mman, despite earnings dropping, you expect stock returns to be 5% year? With earnings falling, and stocks going up, P/E ratios will be even more out of line with historical averages - and you think this will continue for 10 years?
Earnings aren't dropping, they've been increasing. 2016 saw higher earnings than 2015 and 2017 likely higher than 2016 (at least as much as anybody can forecast a few months in advance). As for P/E ratios, the link I just posted is predicting 5+% return unrelated to P/E ratios because the money has to go somewhere. You can't say well stocks look bad so I'll go stick my money somewhere worse. What are you forecasting for bonds over that time frame? Treasuries? Cash?
And I don't expect stock returns to be 5% every year, merely the best objective evidence suggests that is what it will average for the next decade. People have been arguing stocks are overpriced since early 2011, 6 years later and anybody following their advice missed massive returns. Don't totally sit it out because it looks a little pricey. Earnings may catch up over that time so the P/E ratio looks smaller.
And I don't put money in and hope it comes out OK. I invest in companies that I (with very good reason) expect to earn more money in the future than they do today. And Merkel isn't pushing anybody into bonds right now, he simply rebalances his holdings to stay at a designated asset allocation within a fairly narrow range. Now if you got to the point where expected returns for 10 years were in the 2-3% range, bonds would look a lot more attractive.
So the market looks really expensive
- you would think people would be cautious.
I completely agree that we have no idea where U.S.A. equities are heading next week, 6 months from now or next year. That said, USA equities are getting pricier with the Fed raising rates three more times this year. The Fed is making the savings rate look better vs risky assets in expensive USA equities. What this means for the average investor is be cautious going forward and think hard about your cash allocation.
In 2011 the Fed was not raising rates and equities were NOT over 1.00 Fair Value (based on Morningstar data). Even in 2015 Morningstar had Fair Value just below 1.00 for most of the year.
Have you lived through the market crashes of 2000 and 2007/2008? Do you realize that having CASH on hand at those times would have made you a lot of money vs holding 90-100% Equities? Sure, nobody can time the market but with the FED raising rates and fair value approaching 1.10 the signs are all there for a correction. Hence, now is not the time to be greedy but raise some cash so you have 10% more than your typical non equity exposure ready to deploy when (not if) the market's fair value falls below 0.90.
What exactly is it about the atmosphere today that you think looks anything like the irrational exuberance of 1999 NASDAQ or 2005 housing, that makes you think people aren't being cautious?
Yes I have lived through the market crashes of 2001/2 and 2008, albeit with far less money in the game than I have now. And who the hell holds 90-100% equities? I wouldn't advocate that as an asset allocation for anybody. Personally of my invested assets I'm around 75% equities, though it's more like only 50% of my net worth, and of that 75% probably 1/4 of it is international.
I believe in diversifying your investments unless something is so overwhelmingly cheap that you feel the need to overweight it. US equities do seem a bit on the pricey side, but not so much that I feel they are a losing bet going forward (especially when I look at other asset valuations and expected returns). They just won't have the astronomical returns you could get in 2008/9.
edit: and for those that want to compare now to times like 2000 or 2007 or whatever. Did you know that in January 2000, the 30 year US Treasury had a 6.6% yield? Heck, the 10 year had a 6.5% yield. Small wonder that investing in stocks that had an earnings yield of like 2 or 3% at the time turned out worse than a treasury approaching 7%. Today with treasury's yield in the low 2% range, stocks with an earnings yield of 5% look a lot more attractive.
Let's see what the Fed does this year and if Trump actually gets any of his economic agenda through Congress (hint: I doubt it).
Also, to say there is no alternative, so just put your money in the most risky assets - again, seems a little short-sided to me.
Regarding earnings - 2016 was a good year. Hopefully things are turning.
So what alternative do you suggest to people at this point?
And as for earnings, 2016 was a good year and 2017 is shaping up to be significantly better. PE and CAPE will both be dropping even if the market stays flat.
Searching for the Stock Market’s Fair Value
Lower macroeconomic volatility justifies a higher fair value than the historical average, but the current price of the stock market still appears expensive, says a new report from Research Affiliates.
REITS, real estate, municipal bonds that you will hold to maturity, Gold, buy puts, etc.So what alternative do you suggest to people at this point?
And as for earnings, 2016 was a good year and 2017 is shaping up to be significantly better. PE and CAPE will both be dropping even if the market stays flat.
REITS, real estate, municipal bonds that you will hold to maturity, Gold, buy puts, etc.
I personally think a BB rated municipal bond with tax free payouts is less risky than equities.
But you didn't answer the question I had. What would have to happen in equities markets and moves by the FEDS, and GDP, and corporate leveraging, and consumer debt - for you to say, "ya know what? Equities seem too risky for me. I think I'll greatly lessen my exposure." Is there a point that you would say that? Or you all the way in - hook, line, sinker - at all points?
Like I said - make your bed, you lay in it.I think REITs, municipal bonds, gold, and puts are all significantly riskier purchases than equities with any money you plan to hold on to for decades. Way worse. And real estate? That's a complicated subject and tends to involve a lot of speculation that I don't feel is appropriate for significant retirement assets. Does it deserve some place? Of course. I've got probably 25% of my net worth tied up in real estate which seems plenty for me at this point.
And what would have to happen to get me to greatly lessen my exposure to equities? I dunno, maybe if the Fed rate got really high (in both nominal and real terms), but it's still less than inflation. Maybe if GDP shrunk by 20% and stock prices stayed flat. Maybe if the market went up 30% this year I'd back off a bit more. People act like we are in a bubble, but we aren't even remotely near a bubble.
But in a world with stock earnings yields in the 5% range compared to treasury's in the 2% range and cash yielding nothing and bonds yielding way less? Sign me up for stocks. It's a relatively great investment. When you start wanting to pour money into bad municipal bonds in a world where municipalities can and do go bankrupt, no thanks. I mean Puerto Rico was BB rated a few years ago. Do you think those investors feel their investment was less risky than stocks?
We are in a country with expanding corporate profits, likely near term corporate tax changes that will make them even more profitable (even democrats want this), and no other good options for large scale investment.
Like I said - make your bed, you lay in it.
Most People aren't saying we are in a bubble. The money flooding into the market is not because people say there is a bubble. It is flooding into the market because people say there is no other alternative. Because people claim history has no bearing on future direction. It's because people say massive corporate debt will magically go away, even with rising interest rates. It's because people think the FED model works.
One thing I love about this forum is that old posts are archived forever so it's easy to see which predictions came true and which didn't. I'm expecting to log back on in 30 years with the S&P @ about 12,000-20,000 and chuckle at the idea stocks were expensive today with it at 2355.
Is money really "flooding into the market"? I mean every stock purchase has a stock sale on the other side and the market really hasn't gone crazy in the last 2 or 3 years so I'm just not seeing any flood of money. Also I'm quite pleased with my retirement planning. I am not looking for any pats on the back, I'm just trying to educate those that are less sure of their plan and reassure them that staying the course is the right move.
One thing I love about this forum is that old posts are archived forever so it's easy to see which predictions came true and which didn't. I'm expecting to log back on in 30 years with the S&P @ about 12,000-20,000 and chuckle at the idea stocks were expensive today with it at 2355.
Would love to see someone go through even the last year's worth of posts and point out some of the ridiculous predictions people made. As I've said before, if anyone on here could consistently time the market, you wouldn't be on SDN. You'd be on a yacht in the Med.
For fun, read about the doom and gloom and the oncoming crash in Jan 2016 of this thread. Listen to the great advice on SDN about the for certain drop in US equity prices and you would have missed out on 15% gains in the sap500 from then until now.
actually, the last time you argued what you're saying now was jan 2016. Take a look at the start of this very thread. You were discussing overvalued equities, just as you are now. Since your post back then, the s&p500 added ~15 precent. Just saying.The last time I had this argument was 2007.
actually, the last time you argued what you're saying now was jan 2016. Take a look at the start of this very thread. You were discussing overvalued equities, just as you are now. Since your post back then, the s&p500 added ~15 precent. Just saying.
Well I can tell you my portfolio would be a lot smaller today if I had invested all my money exactly as the experts said to do. Instead, I prefer to go to my full equity exposure once a true bear market sets in. This strategy has been the one to use since 2000 and would trounce the notion that the same asset allocation should be used in all market conditions. These days the computers dictate a lot of the exit from the markets so as valuations get stretched the best approach is to scale back equity exposure and wait for a better entry point. This has worked like a charm since 2000 and is my long term strategy. I'll probably vary my equity exposure by 10-15 percent based on market conditions and valuations.
It's fine to keep buying equities every month but it would also be fine to use some technical Analysis along with fair value analysis to determine equity exposure. Stocks are not cheap right now and some are very expensive. Historically, that has led to underperformance.
The investing gurus are using data prior to the entry of super computers, ETFs and regular investors being able to sell with the click of a mouse. I submit to you this has changed the way the market acts and the speed in which things now move. That's why you can see flash crashes and vast price movements in minutes. I agree it's hard to time the market but it's not hard to keep cash on the sidelines for bear markets especially when the current bull market is long overdue for a correction. I'm not advocating single stock selection but rather common sense investing based on valuation and basic technical analysis.
Orders to buy Developed Foreign Markets and Emerging Markets placed today with likely trigger tomorrow. Order to buy Large Cap ETF placed today if market declines another 4% from here.
I'd love to get GOLD at $900 an ounce but that won't be this week. GDX at under $13 and Ill buy more.
Maybe some more energy stocks on weakness.
Valuation-Based Tactical Asset Allocation In Retirement And The Impact Of Market Valuation On Declining And Rising Equity Glidepaths
Valuation-Based Tactical Asset Allocation In Retirement
Given today’s valuation environment, where Shiller P/E10 really is at elevated levels, this would suggest that conservatism is still merited for today’s retirees, either by owning less equities with an expected rising equity glidepath, or at least underweighting them on a valuation basis until the valuation moves into the “fairly valued” zone.
The last time I had this argument was 2007. All the SDNers were acting just like you. We all know how that ended. No point in re-arguing the same points over and over again. All I can say is the greatest investors (not speculators or traders) would urge caution at these valuations.
I guess I'm arguing valuations right now are nothing like 2007. At that point you could get a 10 year US treasury with a yield > 5%. This was with an S&P earnings yield of like 5.5% which is nearly identical. Right now stocks yield more than double the 10 year treasury. 2007 was also a time of falling corporate earnings from a peak of 2006. We appear to be still on an upswing of corporate earnings with 2017 > 2016 > 2015.
If yield on treasury = yield on stock, buy the treasury. If yield on stocks >>>> yield on treasury, buy the stocks. That simple math would've kept you out of harms way on 2001/2002 and 2008.
Well nearly 4 months later Dec 12th to April 4th) and we sitting on a 5% increase in the S&P since your claimed the 25-40% drop was coming in a few months. Vague bear predictions certainly never get called out after the fact, but you purposefully didn't want to be vague.
Personally I don't know or care when the next market drop will happen, but I will be ready to keep buying stocks right on through it.