CAPE

Library_Throwaway999

Big tech companies were wildly overvalued according to business fundamentals and index funds are disproportionately exposed to big tech. Big tech companies got too expensive and index fund growth started slowing in February and March. Growth got downright choppy in early April, then Powell told us that the CPI hadn't decreased enough and Israel and Iran started going at it - people freaked out and sold. My .02? The CAPE for the S&P 500 and the Nasdaq was too damn high! The market was overpriced and a correction needed to occur. I don't think the pullback would have been as drastic if we weren't coming off such a ridiculous boom cycle. Annoyed with the rigidity and dogmatism of the Boglehead approach. It absolutely works for the most part but it has its flaws. Yes, the index funds are going back up! No, I don't want to buy them at all-time high valuations! Some of these value index funds like SCHD with boring blue-chip companies are looking attractive by comparison. Can we try to hedge and respond, FFS?

AnotherThrowaway2841

Rolled over my Roth IRA from a robo-advisor account to a regular Roth IRA account last week. Keeping it in a money market inside the Roth for now. Not putting anything into the market at these valuations (CAPE/Schiller PE is still too damn high, momentum is poor after the news about a lack of rate cuts). Going into index funds when this comes down a few more points. Tangent: I wish I could afford AutoZone. Huge market share and with high interest rates, we’re going to be driving and repairing our clunkers until they crap out, then replacing them with other clunkers. Don’t see consumers buying new cars for a while. The market clearly knows this, which is why this stock keeps going up and costs almost 3K per share!

AP9384629344432

If you believe valuations will not expand much more, then that is [very bad news for future returns for US large caps](https://www.aqr.com/Insights/Research/White-Papers/Driving-with-the-Rear-View-Mirror). You'd need record-level sustained earnings growth to repeat past equity performance (10-12% returns per year). We could very well have a decade of mediocre returns in US large caps as a consequence. [You can skip to page 9 if you want the TL;DR. > [If you] assume 6% **real** earnings growth, which is roughly the best ever outcome over a 10-year period during normal, non-recessionary times, the market would still need to trade at all-time- high valuations (CAPE of 51) to match the last decade’s excess-of-cash performance

ThinkingOfTheOldDays

stagflation isn't great for stonks either, particularly at a pretty high CAPE ratio.

straightbear123

Look at any fundamental metric out there, we are at or near historic highs right now....and they take inflation into account! P/E, P/S, Buffett Indicator, CAPE Ratio. Inflation or not, this shit is insanely overpriced. And the ratios will become far more skewed when the recession finally hits, because earnings and revenue will nose dive. I think 5% risk less fixed income is the move right now...short term (like 3 month securities) so you can roll into new ones that will automatically adjust with inflation. Puts are actually the real move, but not everyone has that kind of risk tolerance. People are insane to be long the market at these metrics though

PostPostMinimalist

Well…. Market returns have still outpaced profits. Expected returns based on things like PE or CAPE are much lower than the returns we’ve seen recently, which historically raises the odds of a downturn or just being flat for a while. But we’ll see, there’s also reasons this could not be the case

VotedOut

And since the late 1800s, the [Shiller CAPE ratio](https://www.multpl.com/shiller-pe) of the market is the highest it has been since 1999/2000 and 2021... so it's mostly been going up on hot air and bulltard momentum lately.

kelsos666

Just searched for a market with the lowest Shiller CAPE ratio, relatively political stability (no dictatorship), soaring economy, good education system and a young population. Surprisingly it’s not India. The result I got was Singapore. Any redditor from Singapore here? Would you invest into your own economy?

hungryhippo3-14

I’m 28 years old, live in the US, earn $66,000 per year, and have been investing for about 6 years. I have no debt and about $145,000 invested (saving for retirement). I have approximately 70% in a Vanguard International Stock Index Fund and 30% in a Vanguard REIT Index Fund. My returns have been pretty mediocre over that time, much lower than if I had invested in an S&P 500 Index Fund. I invest mostly in international stocks because they have a substantially lower CAPE Ratio than the S&P. The CAPE Ratio has been a relatively reliable predictor of long-term returns in the past. I am just questioning whether I should stay the course. In theory with the current high prices of US stocks, international should overperform them in the future. However, I have just gotten tired of my investments underperforming. Any advice would be appreciated.

Umojamon

Yeah, but at the moment he has $168 billion in cash. With the the S&P at a current trailing PE of 28 and the CAPE ratio in the 97th percentile now may not be the best time to lay down a big chunk of your life savings into an S&P 500 index fund/ETF. They need professional advice.

SpongEWorTHiebOb

Almost known of the stocks you mentioned meet the classic definition of a value stock. I own MSFT but it’s forward PE is over 31. WMT forward PE is 25? That’s nuts. Historically it’s traded at a PE in the low teens. KO based on its historical PE looks relatively cheap but not classically cheap. The issue with them is can they sustain recent revenue and volume growth and contain costs. Right now it’s a question mark. I own VZ but it’s gone no where for 5 years, has a lot of debt and it has an unknown liability for the lead sheathing issue. The uncertainty means it’s probably fairly valued in low 40s but it’s a reliable dividend yield at 6.3%. Amgen looks cheap but they have a lot of drugs coming off patent and their pipeline has a lot of uncertainty. In other words they are past peak earnings and will see a slow erosion in revenue and earnings. MCD is not a cheap stock at all. Price increases have driven away a large part of the population and they sell low quality food. Competition is also an issue. You can eat at Panera, Chipotle and other chains offering better healthier food options. Overall market is at the high end of the CAPE PE, the odds of any us finding a true value stock without some major uncertainty that will outperform without a significant increase in the beta of your portfolio is laughable.

Durumbuzafeju

Swiss market is pretty expensive right now, its CAPE value is halfway between the US and the EU average. https://indices.cib.barclays/IM/21/en/indices/static/historic-cape.app

zendaddy76

I did this in my brokerage in January 2020 with about $100k. Market dropped 20-30%, and I hopped back in early April shortly after J POW announced lowering rates to zero. It felt gutsy but right, and it was with only 10% of my NW. I’m right about 3/4 of the time, which is good enough for me. I might do it again next week, Schiller CAPE is nearing 2022 and 2001 levels. Good luck!

huge_clock

P/S and CAPE are actually great demand measures because they measure the price people are willing to pay for the same unit of financial performance.

Aggressive-Donkey-10

What you are feeling is called Intelligence and Awareness. Yes we are ridiculously overpriced by any metric, Buffet Metric: Total stock market /GDP, or Shiller 10yr CAPE ratio is now 34, it was 29 in 0ctober of 1929, if you flip /100 the cape ratio of 34 this then suggests the returns for next 10yrs will average 2.9% a year, and this simple tool has been exceedingly accurate in its predictions, in 3/2000, CAPE was at 44, and next 10 yrs the return should have been about 2%, but was actually worse at -0.9% a year next question is what do you do?, just pretend it doesn't matter, keep it fully invested and ride it out like the Bogleheads answer to everything? "Time in the Market beats Timing the market." Well even Jack Bogle didn't believe in that cowardly approach. In late '99, he called the market Frothy and Ebullient, and he sold all his equities and went 100% full cash/bonds, and he invented the first SP500 Index Fund back in 76. What's the answer? No one knows, but you are asking the most salient question in all of investing, which is "what's the value of XYZ?" Perhaps take some risk off, and go to CASH at 5.4% tbills or 5.37% USFR, or buy REITs, they have beaten the SP500 by >1% since 1970, 13% vrs 12% nominal and currently are cheap due to recent rise in interest rates. Good Luck , but great question and very valid concerns

BuyAndFold33

There are other places besides the S&P 500. Smaller companies and some developed international are putting out decent growth given their valuations. I’ve simply began tossing more money at those instead. I looked at the chart last week and it honestly looks like CAPE likes 28 as a baseline now lol. In other words, I’m not expecting it to “correct” to 17.

beerion

Valuations matter, and the shiller PE has strong correlation to future expected returns. Source: https://www.invesco.com/apac/en/institutional/insights/market-outlook/applied-philosophy-the-shiller-PE-and-SP-500-returns.html It has poor predictive power for the short term, so no one knows what will happen in the next 1 to 3 years. But on a 10 year time frame, we can predict roughly what returns will look like: which is likely 3-5% real returns. That could play out in a ton of different ways: steady 4% each year, crash now and strong returns later, strong returns now and crash later. So there's no point in trying to time anything. Of course, things can buoy returns as well. Strong earnings growth over the period would obviously lift returns without making the market more expensive. The single biggest metric that I look at is the spread between the CAPE and the 10 year treasury (1/CAPE - treasury yield). Right now, that spread is -1.3%. For reference, that spread in January of 2000 was -4.3%. So I don't think we're anywhere near bubble territory. Overall, I think now is a great time to be diversified. The U.S. looks expensive but has had higher earnings growth than the rest of the world, so a more expensive valuation is somewhat justified. Ex-US is much cheaper on a valuation basis (CAPEs around 12-15), but have had slower growth. And bonds offer an attractive yield with obviously no growth, but are risk free. The reason PE ratios have been climbing over the last half century is two fold: 1. Bond yields have been steadily declining since the 80s. 2. The US market is perceived as very safe (or low risk). Again, low risk typically means low returns. Point 1, above, has buoyed returns over that period though, adding roughly 3% per year. Anyways, I'm rambling now, but the point is don't be scared to invest, but also don't expect 10% returns going forward. And diversify.

thewimsey

> it does so very accurately BTW. No. It's horrible. Terrible. It has *never* successfully predicted market returns over a 10 year period. In the last 10 year period, it was spectacularly wrong. CAPE only works looking backwards. You can fit a trend line to CAPE over the past 10 years and it will look like it explained what happened. But it has never worked looking forward because CAPE ratios that were considered high in 2000 were no longer considered high in 2010, and those considered high in 2010 are no longer considered high today. But from the point of view of a person in 2010, the ratios seemed historically and and thus the prediction was that future returns would be low. But of course they weren't.

thewimsey

>but isn't anyone else worried? No. Shiller CAPE has always been wrong trying to predict future stock prices. It's a useless tool.

Humble_Increase7503

From your article: “Vanguard found that the R-squared, or predictive ability, of the Shiller CAPE and 10-year returns between 1926 and 2011 was 0.43. Although 0.43 is high for an asset whose returns are assumed to be random, it gives CAPE critics a reason to dismiss its value.” Then the author goes onto state that he went off on his own and made his own model, just *from 1996 to 2020*, and the R-squared was higher, that’s the part you quoted from. which is the part you’re quoting from in your post… It’s misleading of you to leave that out in your snarky comment. Regardless, your statement isn’t relevant, nor does it contradict what I said, i.e. that we’ve been trading well above the all time historic PE for decades now.

kiwimancy

^Shiller I suppose you could ask analysts to predict several years out into the future and average them. One of the main reasons to use CAPE over TTM P/E is that CAPE goes down when the market falls sharply. TTM P/E can go *up* because earnings get crushed one year. From the above chart, forward P/E went down in 2009 as desired. Averaging more future years might be even better for smoothing out effects like that, but analysts predictions will be less accurate further out, so I would expect it not to add value overall.

HulksInvinciblePants

Really, is that why returns have been fantastic despite a constant, implied weakness? Amazing it’s never once signaled the market was fairly value, beyond massive drawdowns. We’re only up a mere 70% since that article was written. How about Schiller saying [these values are sustainable?](https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11) CAPE fanatics really can’t handle how it’s not the end all be all metric.

nostratic

67% of the time the return was plus or minus 1.37% from the CAPE model prediction; and 95% of the time the actual return was within 2.74% of the future 10-year predicted returns. CAPE’s ability to predict 10-year future returns during the last 25 years has been remarkable. https://www.advisorperspectives.com/articles/2020/07/20/the-remarkable-accuracy-of-cape-as-a-predictor-of-returns-1

nostratic

for all the naysayers who don't know what the fukc they're talking about: >67% of the time the return was plus or minus 1.37% from the CAPE model prediction; and 95% of the time the actual return was within 2.74% of the future 10-year predicted returns. CAPE’s ability to predict 10-year future returns during the last 25 years has been remarkable. https://www.advisorperspectives.com/articles/2020/07/20/the-remarkable-accuracy-of-cape-as-a-predictor-of-returns-1

nostratic

>It's been different for about 33 years now umm no. >67% of the time the return was plus or minus 1.37% from the CAPE model prediction; and 95% of the time the actual return was within 2.74% of the future 10-year predicted returns. CAPE’s ability to predict 10-year future returns during the last 25 years has been remarkable. https://www.advisorperspectives.com/articles/2020/07/20/the-remarkable-accuracy-of-cape-as-a-predictor-of-returns-1

nostratic

tell us you don't understand shiller p/e without telling us you don't understand shiller p/e >67% of the time the return was plus or minus 1.37% from the CAPE model prediction; and 95% of the time the actual return was within 2.74% of the future 10-year predicted returns. CAPE’s ability to predict 10-year future returns during the last 25 years has been remarkable. https://www.advisorperspectives.com/articles/2020/07/20/the-remarkable-accuracy-of-cape-as-a-predictor-of-returns-1

nostratic

>Look at the history of this indicator. ok I looked: > 67% of the time the return was plus or minus 1.37% from the CAPE model prediction; and 95% of the time the actual return was within 2.74% of the future 10-year predicted returns. CAPE’s ability to predict 10-year future returns during the last 25 years has been remarkable. https://www.advisorperspectives.com/articles/2020/07/20/the-remarkable-accuracy-of-cape-as-a-predictor-of-returns-1 >A simple backtest of what you are saying shows that you would’ve underperformed the market OP made a prediction about the next 10 years, not an analysis of what happened in the past. try reading the question next time.

tyehlomor

An interesting article on the historical superiority of CAPE to forward PE: https://www.livewiremarkets.com/wires/everything-the-mainstream-says-about-earnings-is-wrong

SpaceDetective

I've been using [this which shows the CAPE (Cyclic-Adjusted PE) for different countries.](https://indices.cib.barclays/IM/21/en/indices/static/historic-cape.app)

straightbear123

Imagine being bullish when markets are at all time highs, inflation is still red hot (and coming back, just look at oil), rates are the highest they've been in 20 years (although at a historical norm actually but this market is going to be completely shocked due to expecting ZIRP), some of the highest fundamental valuations in the history of our country's markets (Buffett indicator, PE, CAPE PE, P/S, P/BV, home value vs. income, etc.), crypto at all time high, the first ever quantitative tightening campaign, the commercial real estate crisis, the list goes on. The crash will be absolutely biblical. SPY back to 150 within 3 years

Downtown-Web3655

We don't talk about CAPE here

thewimsey

SP was also overpriced in 2013 according to CAPE. CAPE doesn't predict the market. Even Shiller concedes that now.

Downtown-Web3655

SP 500 is most overpriced in the current decade (and second in the century) - see Excess CAPE

tyehlomor

Good article on the superiority of CAPE to forward earnings PE: https://www.livewiremarkets.com/wires/everything-the-mainstream-says-about-earnings-is-wrong

WhySoUnSirious

Money supply is exponentially higher today than it was during that dotcom CAPE. We can go a shit load higher on the cape. The money is there in the system to allow it.

SpaceDetective

Long term sure but we're already creeping into bubble territory especially with the AI hype which IMHO is likely to overcook within the next few years and cause a dotcom style hangover. [Worth keeping an eye on the CAPE (cyclic-adjusted PE) ratios.](https://indices.cib.barclays/IM/21/en/indices/static/historic-cape.app)

AP9384629344432

If it is, I'm hedged by having 31% of my portfolio in ex-US stocks, and a heavy [(global) small cap value tilt](https://i.imgur.com/o0JM6mT.png) relative to VT. Both of which are at historically cheap levels. So if the Shiller CAPE is still relevant, I am not so heavily exposed to the S&P 500 only.

Downtown-Web3655

What about Excess-CAPE ? It is at the moment lowest in the history: [https://en.macromicro.me/charts/27100/us-shiller-ecy](https://en.macromicro.me/charts/27100/us-shiller-ecy)

thewimsey

It wasn't right at all. It (their 2013 ten year outlook) predicted US returns at ˜6% and ex US at ˜9%. US returns were 13%+; ex-US returns were just under 5%. And it relied heavily on the same metrics people are using the make the same predictions today - CAPE and high valuations, etc. Of course, the fact that they were wrong then doesn't mean that they are wrong now. What it means is that no one knows what will happen. The flaw is the idea that you can use today's metrics to predict the future in ten years. You can't...because you need to *actually* predict the future. Things that caused the rise of the US market in that time period were things like the rise of TSLA, Apple continuing to outperform despite low cost competition from Android, the rise of NVDA. Other factors that affected prices were Covid - in particular supply chain disruptions, and of course the war in Ukraine and its disruptions. You can't get any of that by looking at valuations and past data. That's obvious with things like Covid and new entry to the markets. But even with Apple - a company wtih a high valuation even in 2013, followed by probably more analysts than any other country...and you still have to guess what will happen 10 years in the future; valuations give you no insight to that .

ThinkingOfTheOldDays

per CNBC, CAPE today is double the historical avg. 

thewimsey

> Shiller p/e over 30, the S&P 500 is likely to have very weak returns in the next 10-15 years. Shiller is complete bullshit. Vanguard relied on it primarily in its 2013 ten year outlook, predicing annualized 9% performance for ex-US and 6% performanc for US equities. The actual result was 13.7% for US and 4.98% for ex-US. No one can predict the future. Shiller CAPE only works retrospectively. Which isn't useful for investing without a time machine.

MrRikleman

Too down valuation measures today place the S&P 500 at among the most expensive in history. P/E is the most widely known of course and today the index is in the 95th percentile of the historical range. There are others of course, CAPE is a widely cited measure, I’ve seen a good case made for non-financial market cap divided by gross value added. Whatever measure you choose, this is among the most expensive markets in history. Exceeded only by the dot com bubble and the 1929 peak.

nostratic

aaaand we're at a top based on all these 100% VOO questions and the numbers of foreigners who are overweight US stocks. you are aware that the S&P 500 is not magical and not always the best performing investment, right? at current valuations, Shiller p/e over 30, the S&P 500 is likely to have very weak returns in the next 10-15 years. https://mebfaber.com/wp-content/uploads/2016/02/Research_2016_01_Predicting_Stock_Market_Returns_Shiller_CAPE_Keimling_1_.pdf the S&P 500 has gone flat for about 40 of the past 100 years. 2000 to 2012, 1968 to 1982 and 1928 to 1943. small cap US stocks, international stocks and bonds have all outperformed the S&P 500 for periods of 10+ year at a time.

Durumbuzafeju

What about CAPE?

jemicarus

The "Buffett indicator" - the ratio of the market value of the entire stock market to GDP, has historically averaged around 65%. The ratio peaked at 88.3 prior to the 1929 crash. At the peak of the dot.com bubble the ratio was 136.9%. Currently the ratio is 185%. Others might be CAPE10, SP concentration in top 10%, tech v energy/commodities, US vs Non-US, etc. If anyone thinks the lords of easy money at the Fed can and will keep shoveling gasoline onto this madness forever, you're welcome to ride the lightning and hope for a blowoff top like we have never seen, which may well be coming. This is bigger than the tulips and the south sea islands.

Rare_Expression2472

Sold $10K to cash today. Let the monetization roll. I'll take 5% in money market rather than an 80% 2000 type NASDAQ devaluation. How can Nividia be worth more than all of China? Suckers. Japan maxed out at 45% of world capitlization, we're currently at 54% of world cap. CAPE PE of 33. I got a newbie in the office buying on margin and he's never heard of 1987, 1929, 2000, or even 2008. The newbies are in at the highs. Buy high, sell higher said the commission broker. GS sales buy, but they're short.

peachezandsteam

S&P 500 PE ratio is at a good level. I don’t wanna hear about Shiller CAPE; that shit is flawed.

grimkhor

Can you summarize for me real quick how you calculate CAPE/Shiller PE? I have this nagging feeling that you don't know.

Key-Mark4536

You could, but on average it doesn’t pay off. Elm Partners [reviewed decades](https://elmwealth.com/when-if-ever-has-it-paid-to-wait-for-a-stock-market-correction-reviewing-115-years-of-us-stock-market-history/) of market data and found that from a given “expensive” starting point (defined in the paper, basically CAPE >= 1 std. dev. above mean):   - Predicting a correction in the next 3 years was right just over half the time, and would save the investor from about a 10% loss.  - When they were wrong though, they missed out on an average of 30% gains before that correction hit.  - Combining those two, waiting for a correction on average earns 8% less than just going for it.   That said, there’s a reason I repeatedly used the word “average.” If you personally are fairly sure a downturn is coming (keeping in mind that a recession and a correction are different things) by all means move to cash or defensive sectors. Time will tell. 

AP9384629344432

The amount of bullishness on tech in these threads is getting absurd. If your base case is "We will repeat a Dot Com bubble or 2021-era multiple expansion" then I fear some people are going to seriously mess up their accounts. There are people genuinely opening up their first position in NVDA and SMCI. Look, if you weren't smart/lucky enough to predict the earnings surge, are you going to be smart/lucky enough to predict the inevitable earnings correction (in a *cyclical industry*) when supply / competitors enter the scene? 'Shiller CAPE' is outdated is not an argument. Nobody is calling for 12 P/E ratios in the market. Nor 16. Citing YoY figures after earnings recession is misleading. As I posted in yesterday's thread, in order to *not* have an absurd amount of multiple compression (say in the 50s/60s CAPE), you'd have to see *record-breaking* earnings expansion that the US has rarely ever encountered in order to repeat last decade's earnings. Some of y'all are asking if your portfolio should be 3 stocks... (all from Mag 7). Does this seem smart? In the previous thread one upvoted response was, if you're young/single, great idea. Really? You're telling someone who is in their 20s to put 100% of their portfolio in 3 of the most watched companies on the planet, all in the same sector / country, at today's multiples? I'm not saying go be a small cap bro, but come on, humans learned the value of diversification back in Mesopotamia. Anyway, I'm going to brace for an essay in response /u/generouscookie1981 , I've said my part. Here's my TL;DR: Be careful, stay diversified, don't get starry eyed by your dreams of AI utopia. And generouscookie, you said yourself many months ago, if your comments start getting tons of upvotes in this sub, we're getting frothy. This ain't January 2023 anymore.

AP9384629344432

The last decade of dominance [is not repeatable](https://www.aqr.com/Insights/Research/White-Papers/Driving-with-the-Rear-View-Mirror) without absurd multiple expansion and earnings growth. (Skip to page 9 if you're short on time) > Over the past decade, real earnings grew by around 4.5% per year. This was an exceptional outcome relative to postwar history. Indeed, the last 30+ years have been exceptional, with real earnings growth averaging 3.2% per year since 1989, compared to 1.8% between 1950 and 1989. > [...] Assuming real earnings grow by 4.5% per year over the next decade, the CAPE would still need to increase by over 80 percent from its current level of 30 to 55, 25% above its Tech Bubble peak of 44. If we are even more optimistic and assume 6% real earnings growth, which is roughly the best ever outcome over a 10-year period during normal, non-recessionary times, the market would still need to trade at all-time- high valuations (CAPE of 51) to match the last decade’s excess-of-cash performance The last decade had tailwinds of declining corporate tax rates / interest expenses. The next decade probably won't. I'm not bearish on the US large caps, but as AQR writes, "to forecast a repeat performance from equity markets, you must forecast earnings growth at levels unprecedented in a non-recession economy and the market to trade at its richest level ever at the end of the decade. While it’s impossible to rule out this scenario, it is an implausible baseline assumption."

generouscookie1981

People on Reddit love to bitch and moan about Shiller PE as justification that market is in a "giant bubble". >I'm happy to see S&P500 break 5,000 today, but every indicator I can see is screaming that equities are overbought right now. Any thoughts? >Shiller CAPE PE ratio: 33.83, mean value is 16 over the last 100 years >Well, a year ago Shiller PE was at 29 (15% lower) Shiller PE was 29 last year. But what about 2021??? It was actually **38**+, SPX is now higher than before and what did intelligent bulls say? That Shiller PE is an outdated metric for several reasons. 1. The calculation uses 10 years of earnings which is absolutely absurd. Just consider for a moment how different the economy is. Think about corporate IT spend as a start. The importance of cloud and compute, SaaS, PaaS, FaaS, IaaS has exploded, ERP reliance on Big Tech's moats have skyrocketed. 2. **It gets completely distorted by CPI** (which itself uses extremely slow and lagging basket of **personal goods in urban cities** which is usually several years behind every year) which has absolutely nothing to do with corporate expense and cost inflation. In fact you can even argue it even overstates personal inflation because it uses the same basket of goods several years back before adjusting when in reality consumption expenditures dynamically adapt to prices. It's absolutely ridiculous and asinine if you think about it. 3. **The most important reason of all** is that 16 PEs are not coming back ever again. It's based on periodic recurrences of extreme bank reserves scarcity. Central banks around the world operate in a totally different framework from pre-2008 now called ample reserves. Additionally, it included adjustment of risk expectations for severe boom and bust cycles where economic thought believed that it was necessary for the Fed to engineer depression or deep recession like conditions to balance economies. What Covid proved is that we no longer have to have the slow and ineffective response to crises like the GFC where banks were bailed out but no so much the poor and average people.

generouscookie1981

u/karnoculars >I'm happy to see S&P500 break 5,000 today, but every indicator I can see is screaming that equities are overbought right now. Any thoughts? >Shiller CAPE PE ratio: 33.83, mean value is 16 over the last 100 years >Well, a year ago Shiller PE was at 29 (15% lower) and Buffet Indicator was 0.9 (50% lower). Kinda cherry picking right? Shiller PE was 29 last year. But what about 2021??? It was actually **38**+, we are now higher than before and what did intelligent bulls say? That Shiller PE is an outdated metric. For several reasons. 1. The calculation uses 10 years of earnings which is absolutely absurd. Just consider for a moment how different the economy is. Think about corporate IT spend as a start. The importance of cloud and compute, SaaS, PaaS, FaaS, IaaS has exploded, ERP reliance on Big Tech's moats have skyrocketed. 2. **It gets completely distorted by CPI** (which itself uses extremely slow and lagging basket of **personal goods in urban cities** which is usually several years behind every year) which has absolutely nothing to do with corporate expense and cost inflation. In fact you can even argue it even overstates personal inflation because it uses the same basket of goods several years back before adjusting when in reality consumption expenditures dynamically adapt to prices. It's absolutely ridiculous and asinine if you think about it. 3. **The most important reason of all** is that 16 PEs are not coming back ever again. It's based on periodic recurrences of extreme bank reserves scarcity. Central banks around the world operate in a totally different framework from pre-2008 now called ample reserves. Additionally, adjustment of risk expectations for severe boom and bust cycles where economic thought believed that it was necessary for the Fed to engineer depression or deep recession like conditions to balance economies.

generouscookie1981

u/karnoculars >I'm happy to see S&P500 break 5,000 today, but every indicator I can see is screaming that equities are overbought right now. Any thoughts? >Shiller CAPE PE ratio: 33.83, mean value is 16 over the last 100 years >Well, a year ago Shiller PE was at 29 (15% lower) and Buffet Indicator was 0.9 (50% lower). Kinda cherry picking right? Shiller PE was 29 last year. But what about 2021??? It was actually **38**+, we are now higher than before and what did intelligent bulls say? That Shiller PE is an outdated metric. For several reasons. 1. The calculation uses 10 years of earnings which is absolutely absurd. Just consider for a moment how different the economy is. Think about corporate IT spend as a start. The importance of cloud and compute, SaaS, PaaS, FaaS, IaaS has exploded, ERP reliance on Big Tech's moats have skyrocketed. 2. **It gets completely distorted by CPI** (which itself uses extremely slow and lagging basket of **personal goods in urban cities** which is usually several years behind every year) which has absolutely nothing to do with corporate expense and cost inflation. In fact you can even argue it even overstates personal inflation because it uses the same basket of goods several years back before adjusting when in reality consumption expenditures dynamically adapt to prices. It's absolutely ridiculous and asinine if you think about it. 3. **The most important reason of all** is that 16 PEs are not coming back ever again. It's based on periodic periods of extreme scarcity of bank reserves central banks around the world operate in a totally different framework now called ample reserves. Additionally, adjustment of risk expectations for severe boom and bust cycles where economic thought believed that it was necessary for the Fed to engineer depression or deep recession like conditions to balance economies.

generouscookie1981

u/karnoculars >I'm happy to see S&P500 break 5,000 today, but every indicator I can see is screaming that equities are overbought right now. Any thoughts? >Shiller CAPE PE ratio: 33.83, mean value is 16 over the last 100 years >Well, a year ago Shiller PE was at 29 (15% lower) and Buffet Indicator was 0.9 (50% lower). Kinda cherry picking right? Shiller PE was 29 last year. But what about 2021??? It was actually **38**+, we are now higher than before and what did intelligent bulls say? That Shiller PE is an outdated metric. For several reasons. 1. The calculation uses 10 years of earnings which is absolutely absurd. Just consider for a moment how different the economy is. Think about corporate IT spend as a start. The importance of cloud and compute has exploded, ERP reliance on Big Tech's moats have skyrocketed. 2. **It gets completely distorted by CPI** (which itself uses extremely slow and lagging basket of **personal goods in urban cities** which is usually several years behind every year) which has absolutely nothing to do with corporate expense and cost inflation. In fact you can even argue it even overstates personal inflation because it uses the same basket of goods several years back before adjusting when in reality consumption expenditures dynamically adapt to prices. It's absolutely ridiculous and asinine if you think about it. 3. **The most important reason of all** is that 16 PEs are not coming back ever again. It's based on periodic periods of extreme scarcity of bank reserves and adjustment of risk expectations for severe boom and bust cycles where economic thought believed that it was necessary for the Fed to engineer depression or deep recession like conditions to balance economies.

generouscookie1981

u/karnoculars >I'm happy to see S&P500 break 5,000 today, but every indicator I can see is screaming that equities are overbought right now. Any thoughts? >Shiller CAPE PE ratio: 33.83, mean value is 16 over the last 100 years >Well, a year ago Shiller PE was at 29 (15% lower) and Buffet Indicator was 0.9 (50% lower). Kinda cherry picking right? Shiller PE was 29 last year. But what about 2021??? It was actually And what did intelligent bulls say? That Shiller PE is an outdated metric. For several reasons. 1. **It was 38+ in 2021 and now we are even higher.** The calculation uses 10 years of earnings which is absolutely absurd. Just think about how different the economy is. Just think about corporate IT spend as a start. The important of cloud and compute has exploded, ERP reliance on Big Tech's moats have skyrocketed. 2. It gets completely distorted by CPI (which itself uses extremely slow and lagging basket of goods which is usually several years behind every year) which has absolutely nothing to do with corporate expense and cost inflation. It's absolutely ridiculous and asinine if you think about it. 3. **The most important reason of all** is that 16 PEs are not coming back ever again. It's based on periodic periods of extreme scarcity of bank reserves and adjustment of risk expectations for severe boom and bust cycles where economic thought believed that it was necessary for the Fed to engineer depression or deep recession like conditions to balance economies.

tachyonvelocity

Shiller CAPE and Buffett Indicator are extremely misleading. That's because you have to make 2 assumptions, a static valuation for the entire history of an index of stocks, and a static diversification of industries making the index. Yet we know that different companies with different moats, business models, cyclicality, and margins deserve different valuations. There is no way that an energy giant like Exxon Mobil should ever trade at 20x normalized earnings, nor should giant banks like Bank of America, Goldman, or Citigroup should ever trade at 20x earnings. Nor should an index without caps on specific industries trade at a static valuation because different companies rise and fall. If banks and energy stocks made up a majority of the index, the "fair valuation" wouldn't be 20x, it would be much lower because these companies trading at even 16x is overvalued. The high margin, low capex, high moat, high growth companies of today shouldn't be trading at 20x and definitely not at 16x. Basically it doesn't matter what the index valuation is trading at, an index is made up of stocks, and different stocks trade at different multiples. If Exxon and Bank of America become bigger than the Amazons, then the index would be overvalued at 16x, but since Amazon is way bigger than Exxon and Bank of America, 20x isn't overvalued, Amazon trading at 20x would be a bargain.

karnoculars

I'm happy to see S&P500 break 5,000 today, but every indicator I can see is screaming that equities are overbought right now: Shiller CAPE PE ratio: 33.83, mean value is 16 over the last 100 years Buffet Indicator: 185%, putting it at the upper edge of Overvalued and just a few percentage points away from Strongly Overvalued Fear Greed Index: 78, squarely into Extreme Greed territory Nasdaq PE ratio: 35, much higher than long term average

karnoculars

But the levels two years ago were already hyper inflated from QE and low interest rates. Schiller CAPE PE ratio is 34 right now, suggesting that equities are still quite expensive. It could keep running but I wouldn't be surprised if a pullback is coming soon.

AICHEngineer

Sweet summer children born and raised in the 15 year bull market have never fought a bear and forget he exists. I'm 23 so what do I know? It's not like the Internet and libraries have endless quantities of data suggesting that limitless outperformance is theoretically and economically impossible, and overweight megacap companies are drawing s&p Schiller CAPE values up to levels only seen before the dot com bubble and the great depression. It's like standing on a train track with a locomotive barreling at you and the guy on the track says he won't get hit because he hasn't been hit by a train in 15 years. Maybe I'm just stupid and the underlying economics make sense, but this level of deriving value from future expectations seems like overreach from the market. Best case scenario I'm expecting low real returns from US large cap, thus a greater allocation to internationals and to small cap value. I got 40 years to play this game.

bananacakesjoy

CAPE 65 IIRC. USA highest on record was 44

Moist_Lunch_5075

Now factor in capital expansion into the CAPE. What you'll find is that until capital reaches equilibrium in a society after a release (which we're several years from when you consider that most of that expansion is still sitting in bank reserves and only really started to come out into society to influence earnings last year) the CAPE benchmark goes up. You're normalizing the CAPE ratio against periods of time when the capital addressable to the market relative to earnings was between 33-50% less than it is today. people have been making the same argument for imminent decline against the CAPE ratio since mid-2022. Always wrong because nobody making this argument understands the math behind the ratio.

Durumbuzafeju

The SP500's CAPE value (around 32) has only been higher in 2021 and 2000. The market is overvalued. https://www.currentmarketvaluation.com/models/price-earnings.php

somasmile42

to expand a bit - if you look at stuff like Shiller CAPE ratios it would suggest the US market is overvalued and is due for a correction at some point. meaning that US market could dip or stay flat and international funds could outperform domestic (US) equity funds. the trick is predicting when. that's why vanguard has been predicting international funds will have greater returns since the mid 2000s... the problem is they have been dead wrong for more than a decade. US has been the better investment by far over the last 15+ years. and vanguard is still predicting the next 10 years will favor international funds. maybe they'll be right this time or maybe they'll continue to be wrong. fundamentally, the US can't continue to outperform everything else forever. so, eventually, yes international funds will catch up and the US will dip. but historically, the market can sustain high PE ratios for 30+ years and vanguard might not be right until 2040 or later. there's a saying the market can remain irrational longer than you can remain solvent. so, timing the market is really tough. if we could all time the market consistently and accurately we would be millionaires pretty quickly. as jack bogle said: ["Nobody knows nothing"](https://www.youtube.com/watch?v=SoGjEbamK9Y) i'd invite you to check our /r/Bogleheads too. low fee, broad index funds (& some bonds) investments will almost always have you come out ahead.

Durumbuzafeju

At the "Return to normal" stage. The recession fears dissipated like they never were, yet every single economist predicted a recession/depression for 2023. The stock market is overvalued, the SP500's CAPE ratio was only higher in 2000, 2020 and for a very brief time in 2017, since 1950. Stocks are expensive yet people are expecting higher than average returns in the next decade or so. Eventually this fantasy will conflict with the observed reality. Meanwhile the Chinese stock market fell 43% since its peak in 2021. We can dismiss that as an outlier, but that is double the fall the country saw during COVID in early 2020. China is the second largest economy in the world, this deep slump will affect everyone.

Aggressive-Donkey-10

seriously getting alcohol poisoning from the "Time IN the market > timING the market." drinking game i've been playing tonight what about that we are at a higher CAPE ratio than october of 1929, we have unprecedented yearly budget deficit requiring more money printing than ever which should lead to more inflation and thus higher interest rates and lower equity values, China the growth engine of the world slowing to a drunken crawl, other nations banding together to form a Dollar alternative, and most importantly The Detroit Lions are in the NFC Championship game! These are all signs of an impending Financial Apocalypse. Oh wait i forgot one thing Time IN the market > timING the market. :)

123archer

There seems to be no fucking correlation to CAPE

iStryker

Deutsche Bank research is absolute garbage 97% of the time. Not saying I could do better, I couldn’t, but damn. Their notes are just not well written and their decks / charts make me want to smash my keyboard. It’s like they’re trying to be shitty and not in an endearing way like Evercore. That said, I think this chart is basically saying that based on the CAPE ratio today it’s possible to have a multi year run. This chart would probably be better if the years / runs were ordered from low to high CAPE ratios rather than run duration, imo. The use of light blue floating dots makes it hard to quickly figure out what they’re getting at, but it does make sense after a long pause also. The only compares for the multi year run opportunity w/ high CAPE are starting at the Great Depression lows with the WWII boost and post dot com boom aided by what inevitably drove the GFC.

lmao_just_lmao

The CAPE is stupid as fuck anyway. The only reason people use it is because it was first presented at a very lucky time. It uses the last 10 years of earnings to determine valuation. If past earnings had predictive power of future earnings, then the market would be 100% efficient.

GrizThornbody

the 2.0 in red will not keep increasing. S&P just hit an all time high, so that bar is reset. If the market keeps going up, we would essentially be adding bars that are 1 or a few days. Also, second the other post that says WTF is CAPE?

zetaconvex

CAPE = Cyclically Adjusted PE. Instead of taking a PE over 1 year, take it over a number, usually 10. This is supposed to flatten out lumpy earnings. A high CAPE means that the market has a high valuation, implying a correction as valuations become overextended. It's not an indicator of recession per se.

zetaconvex

I PRESUME that it means something like this: in 1929 the CAPE was around 33, a well above average valuation. It took 25 years to reach an all-time high again. So that high valuation took a long time to sweat off. Contrast this to 2022-4, which was at an even higher valuation, but only took 2 years to regain a high. The message here is that stonks these days only ever go up, don't ask questions, buy the dips. The other interpretation is that there is something suspiciously wrong with the markets these days, so if/when it does normalise, watch out.

verbify

CAPE average over roughly 100 years doesn't make sense. 1) Interest rates have fluctuated wildly over the last 100 years - and that has an impact on what PE ratios people are willing to accept. 2) Since roughly the 90s, tech companies have shown the ability to grow at rates that traditional companies were not able to, and the sector has grown massively. They have inflated PE ratios as a result - and this skews the whole market. If you look at Shiller PE from 1990-2024 and the Shiller PE for the 50 years before that, there's a clear pattern where the Shiller PE ratio average has gone up since 1990 - https://www.multpl.com/shiller-pe.

Bernie_Ecclestoned

WTF is CAPE? Label your chart

mrmrmrj

There seems to be some confusion in understanding this chart. The title says "between all-time highs" so that means from one all time high to the next all time high. It is not a bottom to top bull market chart. The SPX made a new all time high on Jan 3, 2022. Then it sold off. The market just took out that high. What this chart is showing you is how many years it took to go from peak to peak and what the CAPE was at the start. As long as the market keeps rising, the 2.0 in RED will keep increasing. tl;dr version: The market made a new high from the last high in an unusually short amount of time given the valuation at the last peak (Jan 3, 2022 in this case).

TealIndigo

> It's been 15 years and the value diverts during every hype cycle before returning to the intrinsic value. What do you think intrinsic value means? What measurements do you use to determine the intrinsic value of crypto? For a stock, you could use earnings, CAPE, cash flow, book value, etc. What do you use to determine crypto is at intrinsic value?

Moist_Lunch_5075

Except, to make the curve fit to create a bearish divergence that suggests a major decline and return to 2019, I manipulated the chart by zooming in to 2021, which is what people are doing when they make this argument most times. If I zoom out to 2019, as I need to do in order to check if we're in the space of a negative divergence that is bringing us back to 2019 valuations, then I get this: ​ https://preview.redd.it/ktkjzgpwu4bc1.png?width=1818&format=png&auto=webp&s=161ca41a203ae1c5181f423fc7bd90f10af5dc35 ​ ... oh. See, here's the thing: It's not just the divergence that matters, it's also where the balance sheet is relative to the market. Right now, high rates and demands from the Fed are making banks risk averse. But the extent of that aversion matters, and the reason for it. It's not that banks are running out of money, it's that the divergence is happening with there still being an excess of liquidity. **The Fed's liquidity increase from 2020 never full entered the market, which is why the bear case so spectacularly failed in 2023. Once tightening slowed, bank reserves could start to open up and margin went back on the menu.** We're not returning to 2019. The Fed is targeting equilibrium between the capital in the economy, I.e. in circulation, and on the balance sheet for 2025, running at a higher level... and the minute any risk of recession comes or we get close to these levels meeting, the Fed's going to put their foot on the gas to avoid deflation and high unemployment. And they absolutely will, because this Fed has done that every single time a threat has occurred. Every single time. We keep hearing that they won't, but literally all evidence says the opposite. And that includes 2023 where they absolutely acted to stop a banking collapse. So is the market going up because people are "pricing in a soft landing?" For that to be the case, then the market would have to be assuming a higher Fed liquidity than is currently addressable by the market, and stock valuations would have to be correct at 2019 levels. The problem is according to the CAPE ratio, 2019 levels are wrong. And according to the Fed balance sheet, we're not actually above addressable capital on the bank balance sheet. Not even close. So the base argument for current market valuations being overpriced is... it's wrong. It's mathematically wrong. It's the product of a narrow view and a dogmatic assumption towards mean reversion, and because of it a lot of people missed one of the most violent market recovery bounces ever. Not exactly a sign that the thesis is active currently. Now I do think that expectations matter and that fear can bring valuations down, so a recession could create a short term self-fulfilling prophecy if bad enough... but does the data support the idea that valuations are high relative to the Fed balance sheet and historicals? Absolutely not.

Moist_Lunch_5075

It's not that I think the Fed is a trump card that will just soothe the market, it's that the assumptions for the bear case - which absolutely did not predict 2023's macro outcomes NOR market outcomes - has a critical flaw that is making it wrong, and you just mentioned it, and that factor explains the behavior we've seen in 2023, which absolutely violated the bear case for that year, and is a factor in why I think bears need to be more careful assuming a crash is coming. You cite Fed liquidity divergence. We do have a divergence. We've actually had a running divergence through most of 2023. It was only during the SVB debacle that we saw any significant divergence away from the downtrend, and while that can kick off a run, it didn't last into it and if you look at what the Fed offset, it wouldn't have gone into the market. As you said, the Fed doesn't care about stocks (except insofar as they impact employment, which they do) and their balance measures don't necessarily feed the market. Things like bond liquidity offsets to keep bank stable (the source of the balance sheet increase in March 2023) are going to be largely sequestered by bank risk departments because the mechanisms are short-lived. They can't, by structure, fuel margin speculation which is how bank feeds largely correlate with market expansion, aside from spurring growth in capital distribution which this definitely didn't do. So you get bear cases based on charts like this: ​ https://preview.redd.it/b5yy7z1dt4bc1.png?width=1826&format=png&auto=webp&s=4fa23a57a827499256eba2767f2a53dc68aa9322 Looks pretty clean, right? The market ran up with the balance sheet and then declined when it began declining. We even have correlation with the bull reversal there, so why didn't it reverse? This is part of the foundation where your "the market is pricing in a soft landing" argument comes from. If you're looking at Fed balance sheet distribution this way, then that makes some sense. The other argument for that is mean reversion on the CAPE ratio - I.e. "stocks are too expensive." The problem: The benchmark people using this methodology are using is 2019 capitalization levels. We're not going back to 2019 capitalization levels, per the Fed, and the CAPE ratio is only just starting to catch up to 2020... it has a median 10 year bias, meaning that it's still primarily weighted prior to 2019. In other words, the correct price for the market being used to claim that we've overshot is mathematically wrong, relating to how the CAPE ratio works. The CAPE ratio is mathematically too short for this market by numerous levels. But wait, you're probably saying, we have the balance sheet versus the market to consider... that suggests a return to 2019 levels due to the divergence. Except, to make the curve fit to create a bearish divergence that suggests a major decline and return to 2019, I manipulated the chart by zooming in to 2021, which is what people are doing when they make this argument most times. If I zoom out to 2019, as I need to do in order to check if we're in the space of a negative divergence that is bringing us back to 2019 valuations, then I get this (need to go to the next comment to attach a new image):

NoShellfish

It depends on whether you are simply maintaining a pre-determined split of stocks/bonds (e.g. 70/30) on a pre-determined schedule (e.g. once every 12 months). This would be "rebalancing" not "market timing" in my opinion. So if the stock market went up a lot in the last year and is now at 75/25, shifting 5% back to bonds would not be market timing. This is a widely accepted concept and is part of why the classic 60/40 portfolio performs so well. Rebalancing actually improves returns when done properly across asset classes. There are also more sophisticated strategies for rebalancing, such as changing the stocks/bonds splits based on metrics such as the CAPE ratio (or other valuation metrics). For example, maybe target 70/30 when CAPE is high, 80/20 when medium and 90/10 when low. This is more debatable, but I still think it's not really market timing as long as there are a predetermined set of rules and you are just following the rules, rather than making different decisions every time based on you gut instinct. In the end, I think true market timing is a spectrum of different levels of sin. For example, the worse one is probably trying to catch the bottom of a stock (catch the falling knife), selling at the bottom due to fear or buying very high due to FOMO. ETFs will always be more stable, but random buy/sell decisions without a clear preset logic will hurt returns in the long run.

thewimsey

> but making educated guesses. No, you aren't. If you had looked at the Shiller CAPE 10 years ago, your educated guess would have been to not invest in equities becuase they were too expensive. If you are 30 years away from retirement, going all in on SPY is a *fine* strategy.

uncleBu

You won’t hear anything other than the market is this wonderful thing that only keeps going up here. There are very good reasons to not go all in SP500 at the moment: * Schiller CAPE ratios are sky high * safe assets giving a real return for the first time in 20 years * US growth trends have been worse than average for the last 10 years, while returns have been way better than average At some point, reality and fundamentals will matter. Part of the problem is knowing when. There are many savvy investors sitting in cash at the moment. Your concerns are justified.

apeawake

I feel this. I pay a lot of attention to multiples and long-run valuation metrics (like Shiller, CAPE) so obviously have thought the market is expensive for a while. Nonetheless, I've recently felt excited and eager to increase my equity exposure around the edges. It's easy to justify it a number of ways, but part of me knows its a pure product of the recent momentum, getting even to me.

Moist_Lunch_5075

They're largely predicting a "crash" (meaning 30%) because of historical return to mean. That's the argument I take issue with: "It must go down because this is unsustainable and it must always go back to where it was historically." No, it doesn't. The amount of capital in the market is different and not freely circulating through the entire economy, and that is obvious in the mean line on the CAPE ratio going up. We're not returning to historical means with any certainty. We might have a recession and end up there, but we don't HAVE to end up there is my point. Because the "mean" winds up being higher because the CAPE ratio mean has a lag, too. It's still stuck with a slight bias towards 2019 dollars. So Johnson was saying that it has to go back into the teens because it's too expensive compared to 2019. That's the part that's wrong. It's not accounting for the change in capital in the market and the mechanics of the CAPE ratio. Blind historicals are meaningless in the market. Now I think a recession is possible. I think there is risk to earnings undershooting in that circumstance. I also think trying to guess at the timing and assuming that it MUST happen is an exercise in failure to understand one's inability to see the future. Now, my larger account is like 50% bonds that I swung at the tops of rates over a 1-2 year ladder, mostly, and I have enough cash to cover my stock positions should they go down considerably during a recession or pullback. So I see it as a high risk period and it helps that I know how to trade bonds to get excess returns pulled forward on zero coupon... ...but does my thesis include me having a perfect barometer for the pricing of the market based on economic factors from 2019? Absolutely not. It's absurd.

Moist_Lunch_5075

>Buying stocks, pushes stocks up. > >Buying bonds, drives yields down, which also makes equities look better, so equities get driven higher too. > >Am I following? Correct. ​ >Ok. Here's where I lose it. At no point here, have equities actually become legitimately "cheap." Why is money jumping back into stocks at a, say, 5% earnings yield, when bonds, despite being bought like mad, are still at a 4% yield? Why don't bonds get bought down to 3% let's say. Because "cheap" isn't the only factor for buying risk equity. In fact, it's the worst factor. Most gains come from trending momentum positions. "Cheap" hasn't been the way to buy stocks for about 30 years (and even then that was debatable). In fact, most strategies that chased downward heading stocks against fundamentals in that period lead people into value traps rather than gains, and often worse into DCA'ing into stocks that were in decline. Now I know you're talking about trading against positive cash flow and earnings and all of that, but the earnings yield doesn't predict the valuation... it's the other way around. Valuation front-runs earnings, and then corrects once earnings come out.... but it still only corrects to a relative position that relates to the addressable capital in the market. ​ >"Well, because the FFR is 5.5% and inflation expectations are 2.5% so, one, there's a nice MM option, and two, there has to be a real yield." > >Ok, so why doesn't money come out of stocks and bonds into MM? See 2022 for that I guess. Although most of that was probably checking accounts. > >So the heart here is that more capital means more money chasing assets and lower yields for those assets, especially stocks. Right? > >I just don't entirely understand why that is the case. For every dollar that goes in (buy) a dollar comes out (sell), right? So someone is selling every time someone is buying. But the buyers are bidding up. Stop thinking about it as a purely zero sum game. It isn't. I know we tend to talk about it that way, but it isn't. There's capital sloshing around in bank reserves, slowly being released to investment houses. There's capital (a LOT of it) in those money market funds. And all of it relates to institutional and personal portfolios. (And most of that money is institutionally managed, NOT checking accounts...) You have to think about these things as portfolio components in long term holdings, since institutions own 80-90% of the market at any given time, and that's how they manage their positions. What happened in 2022 is all part of the same process: When the Fed began raising rates, the projected risk-free rate of return went infinite, for all intents and purposes, as a risk function against the portfolio. Note: I \*never\* said that money can't come out of stocks and go into money market accounts or bonds. I never said that, not once... what I said was that there was no obligation to push everything down to those base valuation levels Hussman is assuming (and has continuously wrongly assumed) that everything has to come down to by virtue of fundamentals alone. When the risk-free rate went infinite (unknown) they \*needed\* to liquidate portfolio risk assets to make room for hedging with MMs and bonds, but also to cover reduction in long term bond devaluation, so that the portfolio doesn't get offsides on the bond side. That explains 2022. Again, I'm not arguing that risk equity premium isn't a thing, I'm arguing that it's a cycle and that addressable capital to the market is a variable in that cycle, and it is. But this process also explains 2023, which those betting on the return to risk premium in 2021 and 2022 got washed out during... because they missed the multi-cyclical aspect to the process. And it makes a lot more sense if you think about all of this as components in a long term portfolio having to work against each other based on a return strategy rather than a binary choice between bonds and equities. Keep in mind, the market is not a barometer of the economy or corporate earnings, those are just components to how some people trade. The market is literally a market where the product is return, and return isn't just profit, it's speculative, it's potential, it's technical, it's based on hopes and dreams and momentum. That's enough to chase. There can be no fundamental reason for a stock to be going up, but people - including money managers - will still chase it because of market parity, competition, greed, etc. You're trying to rationalize the market. The market doesn't care if it's rational. What the market is... is mechanical. ​ >It basically appears that stocks are being valued with no risk premium, and there is no historical precedence for this outside of bubbles, but the capital flush justifies this somehow. Why, exactly? It's not that there's no risk premium, it's that your historical observations about risk premium and bubbles come from periods of flat money supply. Once you realize that money supply is not evenly distributed (I.e. primarily institutions and the wealthy can address it, and they primarily use it for investment) and that the money in the market does not match the money in the economy playing into fundamentals, and once you realize that return projections aren't solely based on earnings but also other factors... the contradiction you're citing dissolves. Bubbles burst because no more capital can enter them, not because they're "expensive compared to 100 years ago." As long as the money is going up, and the money chasing the market is greater than earnings returns, then the dollar per earnings dollar in the market must also go up. That's why the CAPE ratio mean is going up over the past 20+ years. Basically, people saying this is a bubble... do not understand what makes a bubble a bubble. ​ >I don't think that is a valid assumption. It is not hard to imagine a reality where capital is flush but equity risk premiums still exist. Or am I crazy. If I am, please make it evident to me. Appreciate the discussion. The good news is that your perception that it's a bad assumption comes from a misunderstanding, as the argument is not and has never been that risk equity premiums don't exist, it's that the mechanics of market fundamentals change in a market with differing capital supply traits and my argument is not a refutation of risk equity premiums, but rather based on how they work and how institutions actually trade positions.

Durumbuzafeju

That's why a CAPE value paints a better picture than simply PE as the latter can vary wildly. https://www.currentmarketvaluation.com/models/price-earnings.php

Moist_Lunch_5075

>That capital can also go into bonds, Yes, and I explained elsewhere, the issue with that is that when institutions pick up bonds - as they have been and as I did - they end up offsides. Don't think in a binary way about this, the market operates in constant series of cashflow, positioning, and auction cycles. So when they buy bonds, they don't spend everything on bonds. What happens is that you get offsides, and then when you're buying the buying accumulation eventually drives yields down, and this increases the return of the market against the risk free rate of return. ​ > and it doesn’t change the relative valuations of asset classes But here's the thing: It actually does. The argument here is that more money doesn't matter to relative valuations because eventually that money turns into earnings and then equilibrium can be restored on pricing. The problem is that money distribution isn't equal across the market and insertion of capital into stock is happening at a disproportionate rate. You can see this in the shift in the CAPE ratio since 2000 with it progressively having a higher overall mean. Everyone, literally everyone, who has argued for a return to fundamentals in the past 25 years has been wrong about that thesis... there are 3 total periods where they declared victory: the dot com crash, 2008 bubble, and 2020.... but in all 3 cases, what was predicted by those theories didn't really come to pass in truth, it was other factors, not a return to mean thesis. So there's a huge chink in the armor to the "relative valuations aren't affected by addressable cash" argument: It relies on an unrealistic assumption. ​ >The argument for a historical risk premium relative to treasuries is historically justified. Read a bit on the equity risk premium. It has temporarily been deflated, as it has several times in history, momentarily. You're doing a lot of banging the table and demanding that you're right here and not a lot of actual analysis. I know what the equity risk premium is. My argument is 100% in how the equity risk premium works, which is entirely around portfolio construction and trends. My argument is that the cycle of chasing risk reduction by drawing the market towards the equity risk premium is exactly the same cycle that subverts it, and that cycle is pushed up by excess capital, which is again in the data for the past 25 years of market behavior. It happening historically does not mean it MUST happen now. Hussman's argument is essentially "it MUST happen." No, it doesn't... and who cares about what in 1948, or or 1956, or any other date you can pull out of a hat? If it doesn't match the context of today, then it's not a good historical comparison. Lots of people trying to curve fit this market over the past year based on historicals got their asses handed to them. Don't make the mistake of leaning into historical thinking, do real analysis on the context.

Moist_Lunch_5075

I dismiss it because in that time, we haven't had an economic cycle driven by a pandemic. The only one that is similar in scope and context happened 10 years before your data starts. "So you're saying this time it's different." Yes, because it is. Can I predict that we won't have a recession and a drawdown anyway? No, and I absolutely think it's a plausible scenario coming up... but that doesn't mean that the thinking used in these charts/data is correct. Here's the problem: Normally these indicators and patterns around treasuries occur because of natural, organic market trading. These ones are not, they're driven directly by the Fed's actions around constraining bank capital release to keep inflation low. At the same time, pandemics reduce the workforce relative to the rest of the population, which drives wage growth. A lot of discussion is put into wage growth coming down and not keeping up with inflation on average, but that ignores that wage growth in the bottom 50% is outsized, and it's that bottom 50% that really drives a normal market cycle decline, because they're most vulnerable in a normal market cycle to retraction. However, when you enter into a condition like this with more of the gains having gone to the most vulnerable in the terms of sustainable wages and low unemployment rates, that means you have more cushion for drawdown. Speaking of cushion, what gets lost in these fundamentals arguments is that they're structured on "return to mean" type expectations. The problem is that over time the mean goes up, so these arguments basically presume that if GDP can't increase, then the market can't increase, and everyone will just buy treasuries because of guaranteed return. Which works to an extent, but the problem is that as treasuries go down in yield, treasury valuations increase. That increases the balance of treasuries in institutional portfolios, which necessitates capital deployment into riskier assets to balance out the growing treasury valuation. This is why yield drops coincide with market gains. So that reduces the risk-free rate of return, and causes a cyclical event that drives up projected market return, and that creates the self-fulfilling prophecy of a chase to risk positioning... which is exactly what you see coming out of sell-off slumps: Just when everything thinks things can't stay up, they go up, break patterns, and accelerate because it's not just about GDP and earnings and risk... ...it's about relative return on capital in the portfolio and the deployment of a continually growing idle cash supply. Because if you look at the Fed balance sheet, most of the money they released isn't actually in the market... it hasn't even left banks yet. They slowed its release on trend, but they put a decade of capital into banks in like one year... and that drives up the CAPE ratio over time. People like Hussman are basing their fundamentals positions off of return to mean on these macro levels, when the actual center of gravity is higher. That's why they keep getting these bubble calls wrong and have since 2008 at least. Because since we started growing the money supply more aggressively entering in the 2000s and only got more aggressive, the amount of capital addressable to the market is higher, which allows you to grow valuation even with capped margins. All of the data in that history is mostly centered on events that happened during a flat money cycle, relatively speaking. This one is not, and isn't coming from a normal business cycle event. Pandemics are different. Now again, we can totally have a recession anyway. We can just have one because we expect one and create the conditions for them... but it won't last or act like a normal recession, in part because the Fed will intercede and in part because of the fact of the difference of contexts. But that's not the bear argument here. The bear argument being made is that we CAN'T structurally go up, so we MUST go down. That is wrong, full stop. We absolutely CAN go up. If these fundamentals and patterns drives worked universally, 2020 should have been a blood bath in the market for the duration... or at least until fall... but it wasn't, because it turns out that the Fed lowering rates and taking the risk out of the market really benefits the chase in long positions.

stvaccount

Just look at the Shiller PE for an answer to that, or even better the CAPE

Moist_Lunch_5075

All of this. Every word of it. I want to add some color to it, though, to support it and how this might manifest next year: The presumption that the Fed will hold rates high just because the economy is good and they want to fight inflation not only ignores the expansionary default, but also ignores that the Fed is aware that their data has "long and variable lags." The Fed may look stupid to people who think their job is just inflation and unemployment, but the Fed is engaged in engineering the economy and their governors are engaged in reputation building and defense, because that's their currency for their careers. For instance, it's common to hear people arguing that the Fed should have been fighting inflation in 2021 by raising slowly then instead of all at once in 2022 and that statement has a certain logic to it, but it ignores that we weren't really in the clear economically from the pandemic until after Omicron proved that it was less deadly, which didn't really show up in the data until December 2021. In fact, the emergence of Omicron killed the rally that November and caused a contraction in the market, so the fund managers who go on CNBC selling this line to get news headlines absolutely know that the Fed wasn't clear on risk to the financial system until after Omicron proved itself, which is around when they started to really signal rate hikes. If you're just thinking "the Fed only fights inflation and they were late" then that move doesn't make sense. If you think about them as part of the banking risk system and their actions as a function of their reputation in that regard, it makes total sense. And the Fed will start cuts "early" (even though 3% is total fine for CPI, they cut it down 70% in like a year... that's a major win... this last 1% is icing on the cake) because they know the two leftover components, housing and used cars, are lagging indicators with markets with their own factors less affected by rates. It's that simple. The beige book talks about deflation and universal slowdowns, and the Fed does NOT want that... because presiding over an economic crash is far worse than inflation. So they will cut early in the hopes that the lags on housing in their metrics will unite with growth in all other areas to approach the 2% target, and even if they don't exactly get there or inflations goes up a little bit, that's much easier on the reputation than a crash. And that's why when he was asked yesterday if he would intercede in a recession, he didn't say no and instead said it would depend on the context. Translation: The Fed Put is BACK! (Although anyone watching SVB and how it was handled knew it was already back, but it's really, fully back now.) The Fed will not just let the economy fall over, and with all the capital out there in the market looking for a home, the expansionary policy will happen whether the Fed wants it to or not... and just fighting that is not economically healthy, and will not work for the Fed because they know they can't pull all of the money out of the banking system and contrary to what people on here and in the pundit sphere think, that's not their goal. They just wanted to slow it down so that the curve more resembled the normal growth of capital in the market over the last couple of decades. And the CAPE ratio shows us that as that money addressable to the market goes up, so do average P/Es since more money means more capital that can sit in a stock against its earnings until the two eventually find common ground, which does not happen when capital is constantly growing. So all of these fundamental claims saying that you need a major earnings growth economy to grow the market are trading in a fundamentals misunderstanding: When you grow the addressable capital, as has happened since 2021 even with balance sheet reductions, the target for market highs and stock highs also goes up. So you can have an economic slowdown, with a lower risk-free rate of return, and more capital and still get market growth.

BoomerHunt-Wassell

Wait, I dont consistently buy. I hold more cash and equivalents when Shiller CAPE is above trend and ladder in when Shiller CAPE is below trend. In layman’s terms I buy the dip. I don’t just mindlessly throw money at the dot-com bubble or near zero interest treasuries or 70k Bitcoin, or tulips because I got paid this week and it’s time to DCA.

uncleBu

Should have around a 30-40% correction based on historical CAPE ratios / current SPY dividend vs risk free rate. Now granted the Fed will throw a wrench into it as soon as things starts to break so when they hose with liquidity it would be a good time to go for a limited time (~8-12 months depending on size of rescue) Every single time the CAPE ratio has been this high (except for the last decade) SPY has underperformed bonds on a decade timeframe. If you are interested read “Irrational exuberance”

thewimsey

> .and surely you couldn't track said multi-decade underperformance with a metric like forward earnings over market cap (Shiller CAPE) Shiller CAPE has never, not once, accurately predicted the market. 10 years ago it would have shown little not no upside equity growth. >I just like to collect downvotes with "conspiracy theories" Don't flatter yourself. You're the perfect trifect of arrogant, condescending, and ignorant.

FilthyWishDragon

That's an impressive amount of smug sarcasm to say "CAPE 10 has historically given poor returns at the current level". I think a lot of people would agree with that. I personally feel like CAPE 10 is a bit flawed since it uses today's PRICE but the last 10 years of EARNINGS. That means that if earnings advance very quickly over 10 years - as they have in the past decade - CAPE 10 is going to be unreasonably gloomy.

uncleBu

Surely, it has never happened that the market is down for a 15 year plus period then. ....and surely you couldn't track said multi-decade underperformance with a metric like forward earnings over market cap (Shiller CAPE) ...and surely this metric is above the dot com bubble on the back of 20 years of zero interest rates that are now gone don't mind me, I just like to collect downvotes with "conspiracy theories"

uncleBu

And how does a P/E ratio of 30 compare to historical values? What has always happened to the stock market when the CAPE ratio was above 30 over the following decade. How come interest rates had a 5x increase and the NPV calculation of most stocks are up? I’m just a crazy person that believes that stock prices should be tied to valuations, this has not been the case from the previous decade, but it might reverse.

karnoculars

I've often heard Schiller PE Ratio, or CAPE ratio, used to assess market value, and many argue that the historical average is 15. However, if you exclude the very bottom of the 2008 crash, the Schiller PE ratio has been above 20 since 1993. That means it hasn't even come close to 15 in the last 30 years. What should we make of this? Have overall market conditions changed to the point where this indicator needs to be looked at differently, and if so, where is "fair value" now?

AP9384629344432

Let me share this funny meme from [Ben Carlson on Twitter](https://i.imgur.com/VMhIPfA.jpg). [Source](https://twitter.com/awealthofcs/status/1720840927705469046). I often get into exchanges like this. Guy who thinks SPY is overvalued but won't invest internationally/small cap value tilt because past decade of returns sucked but that's what is enabling current valuation to be so cheap! Remember, [most of the outperformance of US stocks the last 30 years was multiple expansion, not earnings dominance](https://www.aqr.com/Insights/Research/Journal-Article/International-Diversification-Still-Not-Crazy-after-All-These-Years). To expand on this, a post from Long Equity on Twitter pointed out that ["Of that 16.6% [annualized total returns for the S&P 500 from 2012-2022], 7.4 percentage points came from EPS growth, while 6.9 came from multiple expansion."](https://i.imgur.com/nVEW3dd.png) AQR's point about international stocks is that their worse returns were mostly from not getting 6.9% in multiple expansion (in fact, multiples compressing) while still nearly matching EPS growth. In numbers: "Since 1990, the vast majority of the US’s outperformance versus the MSCI EAFE Index (currency hedged) of a whopping +4.6% per year, was due to changes in valuations. The culprit: In 1990, US equity valuations (using Shiller CAPE14) were about half that of EAFE; at the end of 2022, they were 1.5 times EAFE. Once you control for this tripling of relative valuations, the 4.6% return advantage falls to a statistically insignificant 1.2%." --- Separate note. I've been growing a bit more optimistic about big tech and the broader S&P 500 recently. But there's always that debate of, should you be comfortable investing so much in big tech given that you could be chasing winners? Well, although big tech did have an amazing past decade, it's worth pointing out that big tech (and other US large caps) were actually incredibly cheap in the years following the GFC. [Take a look at these P/E statistics](https://i.imgur.com/rCPcoUR.png). Sometimes people talk about these companies like they were *always* expensive and in bubble territory, but the reality is they were just very cheap post GFC and investors who realized that were greatly rewarded. So the question becomes, for which big companies do you think this is repeatable? In my opinion, buying Apple today is not anywhere close to buying Apple 10 years ago. Imagine getting MSFT for a 10 P/E ratio. But I think a company like META could still perform reasonably well from today's valuations. --- Okay, maybe all that multiple expansion was a low interest rate phenomenon. So who wants to go buy Japanese stocks for some ZIRP returns right now? [Me apparently](https://www.reddit.com/r/stocks/comments/139i09y/rstocks_weekend_discussion_saturday_may_06_2023/jj96or7/).

kiwimancy

Short answer, yes. A bond's yield is its expected return, especially over a horizon closet to its duration. You may want to adjust for risk. Most bonds are less volatile than stocks, and if volatility is the main 'cost' for you of higher returns, then a measure like Sharpe can help you adjust for that and compare investments on an equal risk basis (possibly using leverage if one asset has risk lower than you want). However that requires that you also estimate the future returns of cash as well. Secondly, it's kind of unfair to use a dynamic model for bonds and a static one for stocks. I mean it's not really because the yield of a bond is a very good model of its future return and there's no great model of future stock returns. But you can do somewhat better than a constant by incorporating a measure like CAPE earnings yield.

huge_clock

The reason for the incredible growth in the stock market over the last decade isn’t because companies are making more money or growing faster on average. It’s because the earnings multiple has been expanding (as measured by the (CAPE Shiller)[https://www.multpl.com/shiller-pe]. What this means is that people are paying more money for the same earnings in the stock market. For a long time people said it was because interest rates were low. Now that they are rising it’s time to adjust the market forecast. Something like 4% over the next 10 years seems likely to me.

DrXaos

Most of the superior return of US markets has been driven by changes in valuation, i.e. higher P/E, than superior earnings returns. I.e. US is dominated now by high valuation growth stocks. Not entirely unreasonable given tech dominance (and they are worldwide sellers too). But a huge divergence in CAPE. If or when value comes back, because of this it is likely US will lag. Similar thing happened in 2000-2003. There were all sorts of investing articles in publications with subjects like “when to get back into tech in 2001?” Answer: 2011. The next bull market came much later, and was lead by value and some foreign equities, and then another crash, and then finally tech came back.