Dow posts worst Opening Day in 8 years

This forum made possible through the generous support of SDN members, donors, and sponsors. Thank you.
quote-we-simply-attempt-to-be-fearful-when-others-are-greedy-and-to-be-greedy-only-when-others-are-warren-buffett-26818.jpg

Members don't see this ad.
 


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.
 
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.
 
Members don't see this ad :)
-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.
 
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.
 
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.

Yet, the data shows that holding some extra cash during periods when equity valuations are high (I use Morningstar's number of 1.1) is rewarded with higher returns provided that extra cash is redeployed when valuations fall below fair value (like 0.80 or so). I understand that the easy thing to do is just to keep "cost averaging in" your monthly funds but why not hold a bit more extra cash?

Anyway, I've made my point and you have made yours. I do agree that avoiding any panic selling is the key to successful investing over the long run (along with diversification).

One last point is that when Equity Fair Value hit 0.55 I wasn't buying. I had deployed my cash at 0.70 Fair value and was not comfortable going "all in" at 0.60. This was the stock market crash which truly tested my ability to hold the line.

So, when the market declined from 0.70 to 0.55 it was painful and I felt like an idiot. Of course, ultimately the market is now over 1.06 and again looks expensive. I'm still buying some equities but careful to keep my cash position 10% above my usual allocation model.

Lots of paths to successful investing (which means obtaining your financial goal) but we all can agree on low cost funds/ETFs, diversification and dollar cost averaging strategy (for most of us).
I'm sure individual equity purchases can be the mainstay of a portfolio but since I suck at buying stocks the vast majority of my equity exposure are ETFs (domestic) and Mutual Funds (Foreign, Emerging markets). My bond portfolio consists primarily of PIMCO and Vanguard mutual funds.

I regular check my portfolio for diversification and allocation every 2-3 months. Right now I'm too cash heavy waiting for equities to correct.
 
Last edited:
-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.

EPrevision_21058_image001.jpg


David Merkel (who actually "stole" it from Philsophical Economics) isn't using the same things to generate expected returns as everyone else. It has nothing to do with earnings or valuations or profit margins (link highly recommended reading for anybody that wants serious analysis of how and why to value markets). And this graph has a few decades of historical data that compare the "expected" return vs what you actually got at the time. Pretty darn nice correlation if you ask me.

So despite what people who like simple numbers will tell you, the relative cheapness or expensiveness of stocks can only be evaluated if you are comparing to the other possible investments people can make instead of stocks. It's like being thirsty and trying to buy something at the grocery store. Knowing a 16 oz bottle of Coke costs $1.49 isn't the most useful way to determine if it's cheap or expensive unless you can compare it to your other options like a Pepsi or a bottle of water or OJ or whatever. I mean you have to buy something, so comparing the Coke to your other options is your best measure.
 
  • Like
Reactions: 1 users
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.
 
  • Like
Reactions: 1 users
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.

because most people that buy stocks do not plan to hold them for that long and yes there is risk which is why you get a risk premium attached to them. In fact, I believe the average holding for a stock is now < 6 months. So nobody is buying a stock to hold it for 30 years despite the fact they should. But if you think Treasury's will outperform equities over the next 30 years, feel free to bet that way. But when you state there is a "very real risk" what you mean to say is there is a "very remote, but real, risk".

edit: also not insignificant point that "stocks" is a collection of individual companies that have individual risks. The risk of any 1 company is way higher than the collective risk.
 
Last edited:
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.

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?

And I get it - don't look, just put money in and hope it all comes out okay because it has done well over any 30 year window.

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.
 
Last edited:
He has argued that stocks will imminently crash for decades.

There is a great scene in The Big Short when Michael Burry is arguing with his investors that he knows he isn't wrong. He is 100% correct, and he argues - I know I am right about this, I just may be wrong about the timing.

And the investor spurts out "It's the SAME THING!" because if you are right, but wrong about timing, it's the same as being wrong in the first place. I always think about that....

(Although it did turn out great for Burry - and that investor that tried to sue him. I wonder what happened to that law suite).
 
  • Like
Reactions: 1 user
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.

Because it's extremely unlikely you can predict what's overpriced and when. It's been shown quite frequently that when you try to time the market, you miss out on significant gains. Just curious, when did you buy back in after the crash? Did you time it just right or did you miss a nice chunk of the upswing listening to the shrills it there talking about valuations.

These valuations guys have been saying the same thing for a few years now. In general, they may actually be right. However, market performance didn't bear that out in the last few years and you would have lost a pretty penny listening to them.

Let's face it, there are few people on earth that can time the market and we're not them. Invest broadly in the market in time and assets and you'll be just fine.
 
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.



edit: found most recent estimate for Q1 earnings this year is a 9.1% increase YOY compared to 2016. These will start being reported next week or two so the estimates are likely pretty darn spot on. Earnings are continuing to shoot up, certainly not declining.
 
Last edited:
Members don't see this ad :)
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.

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.
 
Here is a chart showing Fair Value in 2015 as proof that the number was less than 1.00 for the overall market. Equities are more expensive today than in 2015.

3286.jpg
 
So the market looks really expensive

Is it? Sitting on a massive cash pile has been really "expensive" the last 8 years.


- you would think people would be cautious.

People are cautious. Everywhere you look, people are waiting for the crash. Writing articles, wringing hands, posting on doctor forums. Everyone is saying that stocks aren't going to average hit 11%/year over the next couple decades. It's been the near-universal narrative for the last 8 years!

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?
 
  • Like
Reactions: 2 users
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.

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.
 
Last edited:
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).
 

It's clear to me we are due for a pullback based on many factors; I'm simply arguing that one should be prepared for such a pullback/bear market this year by having cash on hand and IMHO, an extra 10% in cash over one's typical allocation model.

For those of us who have watched our portfolios cut in half in '07-'08 we know just how volatile an overheated equity market can get. Of course, I don't expect anything like '07-'08 the next time around but rather the usual 15% or so pullback because USA equities are expensive.
 
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).

I am bullish on the future of business in the US no matter what agenda Trump gets through and no matter what the Fed does this year. The biggest risk in equities is sitting on the sidelines for fear of the upcoming downswing. More fortunes have been lost by that than any other line of reasoning in Wall Street.

But like we all agree, gotta pick the asset allocation you are comfortable with so that you can handle seeing the short downswings when they happen. I certainly wouldn't advocate people getting heavier and heavier into equities at this point, merely staying the course.
 
  • Like
Reactions: 1 user
I want to address a couple of things that have been said.

First - ppg's comment that people are cautious....uh...no they aren't. Markets don't rise like they have when people are cautious. Did you see my link above that shows that margin levels are extremely high - especially when compared to GDP? That isn't cautious. There isn't a ton of cash on the sidelines like there was a year ago. That isn't cautious.

Second - to address this comment or idea - that you can't time the market and if you sit on the sidelines, you will miss huge upside. That is a ridiculous comment - because it ASSUMES you can time the market and pull OUT at the top. No one can do that. So everyone riding the wave up, will ride the wave down - and it usually goes down much quicker and harder than it did when it rose. So if you miss 2 years of upside, does it matter? If the market pulls back 50% and you put your money back in right where you pulled it out - does it matter? Did you miss anything as everyone keeps implying? Do you need to time the bottom? Not at all. And when people say time the market - no one can do that, I don't believe that at all. People can't time it perfectly - of course that is true. But you absolutely can time some things and gain a small advantage.

Also, people say all kinds of things. But MOST have not said the market will crash over the last 8 years... maybe the last few years, but not since the last crash. I think people, in the last few years, have really started to pick up on the failure of a long zero interest policy and know that something has got to give.

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.

But we all make our bed we have to lie in. So good luck to all of us. Good luck to you all in the markets.
 
Last edited:
Questions for the bulls:

When trying to predict future market trends, does history tell us anything? or help in any way?

Does information about the term "business cycles" help in any way?
 
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.
 
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.
 
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.

I get that everybody that uses a historical valuation measure says it is expensive. In fact, I agree. But I have not seen a single person suggest a good alternative to US equities right now for 100% of their money. I mean you have to still take some exposure with new money at whatever asset allocation you want.

There is no alternative that is significantly more attractive right now.

I mean the people that scream the loudest about not buying stocks right now cannot with a straight face tell you to sit in cash or to buy bonds instead.
 
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?
 
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?

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.


And a tangent for those that care about CAPE, here's the last 10 years S&P earnings in $$ (I'll ignore the pennies)...

83
65
60
84
97
102
107
113
106
109

Forecasts for 2017 range from around 120-130. Let's go with 120 to be on the conservative side. End of this year if S&P doesn't move an inch (2355), the PE ratio of the market will be 19.5. And CAPE will kick out the 83 per share earned in 2007 so CAPE will drop down to about 25. Guess what happens the next 2 years as those earnings from 2008 and 2009 drop off? CAPE will drop a good bit more assuming earnings continue to grow or even stay flat. Those last 4 years that CAPE is including in it's measure right now are so terrible that you are guaranteed to see CAPE get better even if the market doesn't drop.
 
Last edited:
  • Like
Reactions: 1 user
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.
 
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.


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.
 
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.
 
Last edited:
  • Like
Reactions: 1 user
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.

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.
 
  • Like
Reactions: 1 user
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.

I'm not telling you to sell all your equities and walk away. Far from it. Instead, raise some cash about 10% over your typical allocation model. This will give you "juice" when the pullback occurs at some point this year.

If you already have too much cash on hand then just relax and be patient.

Plenty of "traders" are buying "insurance" on this market right now. This means options in the VIX or some kind of put strategy. I'm simply keeping it simple by saying hold the course but raise some cash just in case (likely) things get a bit ugly.
 
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.
 
Last edited:
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.

Yes. The market had a brief correction and that was a big buying opportunity. The last time we had a buying opportunity was on election night.;)

I have maintained my 45% equity allocation for now but would like to increase it to 55%. Fortunately, I was able to buy Foreign and Emerging markets last year at a good discount to fair value.

Doze has reminded me many times the equity market is risky and the goal is to win the game. If you have enough money then being conservative is the smart move long term because markets can under-perform for long periods of time.

I would never recommend going "all cash" because most can never time when to get back in. That said, what's wrong with taking some cash off the table when USA stocks are near record highs? Nobody ever went broke taking profits and waiting for a pullback.
 
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.


I posted this Jan 2016. It's still my strategy today as I maintain a 45% position in equities.
 
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.


I posted this early Jan 2016 and this investment did indeed pay off but not until late 2017. Gold remains at 3-4% of my portfolio.
 
Tactical shifts can also occur within an asset class. Assume the 45% strategically allocated to stocks consists of 30% large cap and 15% small cap. If the outlook for small-cap stocks does not look favorable, it may be a wise tactical decision to shift the allocation within stocks to 40% large cap and 5% small cap for a short time until conditions change.

Usually, tactical shifts range from 5 to 10%, though they can be lower. In practice, it is very rare to tactically adjust any asset class by more than 10%. This would show a fundamental problem with the construction of the strategic asset allocation.

Tactical asset allocation is different from rebalancing a portfolio. During rebalancing, trades are made to bring a portfolio back to its desired strategic asset allocation. Tactical asset allocation simply adjusts the strategic asset allocation for a short time with the intention of reverting back to the strategic allocation once the short-term opportunities disappear.



Read more: Tactical Asset Allocation (TAA) Tactical Asset Allocation - TAA
Follow us: Investopedia on Facebook
 
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.
 
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.


I utilize a very generous "fair value" metric from Morningstar which takes into account the low interest rate environment and the earnings potential of the companies.
Only recently has Morningstar consistently stated the USA equity market is above fair value; this is in contrast to others like the Shiller P/E index which I am not using to base my comments on. (shiller P/E index noted on the next post)
 
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.
 
Last edited:
Morgan Stanley says huge 30% stock surge could be ahead; Like 1999, 'cannot afford to miss it'
  • Bank's "bull case" calls for nearly 30 percent gain by S&P 500 in 12 months to 3,000.
  • Strategist says this will be classic "late cycle"-type burst.
  • This is the first major note from new the chief equity strategist at bank.

 
So, how should investors act on Wilson's bullish sentiment?

Based on a "late-cycle thesis," Morgan Stanley is overweight financial, industrial, energy and technology stocks, the strategist said. He didn't offer any specific stock picks

The energy sector in particular, Wilson added, is the single largest incremental driver of S&P 500 earnings growth this year.

"Energy is a classic late-cycle sector and it could offer a modest hedge against potentially rising geopolitical risk," he wrote.

S&P 500 year-to-date performance
1491833300_Untitled.png
 
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.

Looks like Morgan Stanley is on board with you about U.S. stocks in 2017. Likely, things will get even more expensive before we see a market correction. Hence, I'm going to admit defeat for 2017 and give the win to Mman.

Even a 15-20% market correction in 2018 wouldn't compensate for the missed profits in stocks if Morgan Stanley's call is correct.

So, for my viewpoint to hold water the correction in 2018 would need to be pretty darn steep.
 
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.

It's still coming. I believe I said I don't know exactly when, and you can't know exactly when, but it's pretty inevitable. Bond market tells all. 6-12 month lag time possible to see the results in equities. I did think the election/inauguration provided the right conditions to see the crash come, but it didn't. Technicals are still there. I still believe DJI going here by the end of the year...

DJI.JPG


On a side note, DJI up ~4.6% since my post. Silver up 6.5% ;)

Matty
 
Top