Bonds

[wageslave23]

Are bonds starting to look like a good investment option yet?  I haven't owned bonds because I was worried that once the Fed started increasing interest rates that bonds would sink.  Now that bond rates are increasing, is it a good time to get in?  I know near nothing about bonds.  Thanks all.

[EvenSteven]

Are bonds starting to look like a good investment option yet?  I haven't owned bonds because I was worried that once the Fed started increasing interest rates that bonds would sink.  Now that bond rates are increasing, is it a good time to get in?  I know near nothing about bonds.  Thanks all.

I would say yes, but timing the bond market isn't any easier than timing the stock market. If you want to invest in bonds, just pick a bond fund with an average duration that matches your investment timeline and you should be set.

[ChpBstrd]

The answer to that question is the same as asking how high interest rates will go. Consider these scenarios:

1) Persistent inflation causes the federal reserve to raise interest rates beyond current expectations. By mid-2023, ten-year treasuries are yielding 6%. Bonds bought in mid-2022 with yields in the 3-4% range lose massive amounts of value until their yield equals the prevailing rates.

2) Inflation peaks in summer 2022 and starts falling as the US and several other world economies go into recession. The federal reserve board halts their rate hike campaign at a 2% Federal Funds rate. Bonds would rally because they were pricing in rates over 3%.

I've pulled together a lot of data sources and done a lot of speculation on the following thread: https://forum.mrmoneymustache.com/investor-alley/inflation-interest-rates-share-your-data-sources-models-and-assumptions/

[MustacheAndaHalf]

About an hour ago, I listened live to most of Fed Chair Jerome Powell's Q&E at the WSJ Future of Every Thing conference.  Quotes below are quoting Jerome Powell from memory.

The Fed is attempting a "soft or softish landing", which involves a "high degree of difficulty".  Russia invading Ukraine (my phrase, not his) and China shutting down have "added a high degree of difficulty".  Fed Chair Powell was asked for the best historical analog to current conditions, to which he mentioned "once in a century pandemic", large "Fed & Congressional stimulus", "war between two" major "commodity producers", and a major economy like China shutting down.  He said you can't find that situation in history, that there is no useful comparison.  He said something like "this is a time of firsts".

I view this as 5 scenarios, which I'll number (3) to (7) to avoid overlap with ChpBstrd's.

(3) "softish landing" with "a high degree of difficulty" plus "an increased degree of difficulty".  China being closed "prevents supply chains from healing", but "China will reopen at some point".  I would also point to food & energy inflation driven by Russia's invasion of Ukraine, which might have to be resolved in this scenario.  A softish landing means the Fed reaches 2% Fed funds rate and stops, and Treasury yields remain unchanged at around 3%.  Bonds do not take a big gain or loss.

Inflation has been 7-9% for the past 6 months, and in the next scenarios it remains 7-9% going forward.  These scenarios focus on Fed Chair Powell's comments that the Fed "looks at inflation data very carefully", and "inflation has been more persistent" than the Fed hoped. 

(4) market consensus is 3.25% Fed funds rate by the end of 2022.  The Fed continues to act slowly and deliberately, making 0.50% rate hikes at every Fed meeting.  This is the actual market consensus - the base scenario for the bond market.  Somewhere between a Fed funds rate of 2.25% (Sept) and 3.25% (Dec), the bond market pushes treasuries into the 4% to 4.5% range.  Bond holders are hit with higher yields again and lose more money.

(5) with inflation at 7-9%, the Fed acts more quickly than expected to "bring supply and demand into balance".  The Fed introduces 0.75% at a future meeting, say in Sept, and sticks to that pace for the rest of 2022, ending at a Fed funds rate of 4%.  To match this, treasury yields are pushed over 5%, causing significant losses to bond holders.

(6) the Fed acts more quickly and introduces 0.75% rate hikes, but the bond market reaches consensus that a recession is unavoidable, and allows the yield curve to invert.  Short term bond yields are pushed higher, but long term bond yields drop.  Short term bond holders take losses while long term bond holders profit.

I'm not sure if anyone is considering the worst case scenario: "inflation rises".  We already had 7% inflation before China shut down and before Russia invaded Ukraine.  Omicron may be endemic, but China retains Covid Zero and locks down more than expected.

(7)  Inflation is out of control, and the Fed's mission is to control inflation.  The Fed takes Malcom X's motto, by any means neccessary, and is equally hated for it.  Like the above scenario, 0.75% rate hikes appear - but followed by 1.00% rate hikes.
 Volatility spikes but drags bond yields higher, as those predicting 0% yields are dragged higher by those predicting 10% yields.  At inflation similar to 1970s, the Fed acts as it did in the 1970s (under Fed Chair Volcker). The bond market takes huge losses.

I haven't heard (7) mentioned at all on Bloomberg TV or CNBC.  Some people mention 1970s and sometimes you will hear comments about the highest inflation in 40 years... but nobody lays it out as a scenario.  You heard it here first.

How likely are the scenarios?  That's difficult but important:

(3) is very unlikely.  I think "softish landing" is a hint from the Fed.
(4) is most likely, according to the market - it's the market's base scenario
(5) or (6) is most likely for me, differing in yield inversion (6) or not (5)
(7) is unlikely, but should not be ignored by the market

My belief is that bonds take losses going forward.


Disclaimers: My investments profit when stocks and bonds take losses, so that could influence my judgement.  I'm investing for a crash, but have left crash risks out of this already long post.  Any quotes are from Fed Chair Powell speaking earlier today at the WSJ Future of Every Thing conference, which I may have remembered incorrectly.

[wageslave23]

Thank you guys! These comments have been helpful. I think you confirmed my suspicion that there is still more downside than upside.

[Radagast]

We know for sure that bonds are a better buy than they were 6 months or a year ago. Are they a better buy than 6 months or a year from now? Harder to say. I like ChpBstrd's analysis: things can either go way up or way down from here! If you have more than 5 years to go, I would wait until yields are above trailing inflation to start adding them. If you are within 5 years of FIRE, you might as well start building a position now. Savings bonds are a go at any time.

I invest in savings bonds plus the riskier corners of the bond market (ZROZ and VWALX). I am approximately 3-5 years from my FIRE goal so starting to build up the positions. I am dollar cost averaging (DCA) in to all of them, same as I would with stocks. For savings bonds there is no benefit to DCA, but then I don't need a bunch of 0 real return assets enough to monkey with trusts or gifts either. For ZROZ, DCA is probably the least effort method to get a good return by buying into a declining market, same as stocks but even more so. Maximum return on effort. Of course I do think about it and sign into MMM to say that, which is not always low effort. VWALX, somewhere in between. DCA all around!

[frugalecon]

If rates do rise very quickly, purchasing bonds at the short end of the curve might make the most sense, if one wants to buy bonds.

[tooqk4u22]

Short duration bonds (less than 3 years) are good value right now as they already reflect Fed rate hikes, even though they haven't happened yet and they won't get hit too bad if rates rise further.  The yield curve also supports it, basically same return with very little interest rate risk compared to longer term bonds.

I do think that there is still risk of long term rates rising further in near term due to inflation but in medium and longer term will come back into the 3% range as consumers spend down excess cash (in process and inflation is accelerating it), supply chains continue to stabilize, housing comes down/slows down due to higher rates/affordability, etc and then we will be fighting deflationary/low growth economy as we have for the last 20 years. 

We WILL have a recession, there WILL be no soft landing.  Big tech is laying off, big retailers can't control expenses, amazon and walmart said they are over supplied for labor and warehouses....more layoffs.....but as this happens Fed will change course IF inflation moderates.   Fed messed up badly and was way to late to correct so we will overshoot rates.

Low duration for now with incremental buying longer duration (intermediate) when 10yr is 3%+ and long duration as 10yr is 4%+.  Realistically they should go higher than that based on inflation but slowing growth and recession will cap it.

Keep in mind that the 10yr was sub 2% BEFORE the pandemic and fed buying.   

[MustacheAndaHalf]

We WILL have a recession, there WILL be no soft landing.  Big tech is laying off, big retailers can't control expenses, amazon and walmart said they are over supplied for labor and warehouses....more layoffs.....but as this happens Fed will change course IF inflation moderates.   Fed messed up badly and was way to late to correct so we will overshoot rates.

Do any layoffs include software engineers?

Netflix stock (NFLX) lost 68% YTD, but their layoffs involved marketing from what I can tell.  While I think big tech has been "de-FANG'ed", with Netflix out of that club, I think it's worth watching if they have additional rounds of layoffs.
https://www.morningstar.com/stocks/xnas/nflx/trailing-returns

Yesterday when asked for a historical comparison to present circumstances, Fed Chair Powell called this a "time of firsts".  He did not refer to the oil crisis of the 1970s, which involved oil supply problems (which should sound familiar) followed by high inflation.  In 1973 stocks dropped 18.18%, versus 18.69% YTD in 2022.  If the comparison holds, we drop another 1/4 or 1/3rd from here.

[MustacheAndaHalf]

We know for sure that bonds are a better buy than they were 6 months or a year ago. Are they a better buy than 6 months or a year from now? Harder to say. I like ChpBstrd's analysis: things can either go way up or way down from here!

I invest in savings bonds plus the riskier corners of the bond market (ZROZ and VWALX) ... For ZROZ, DCA is probably the least effort method to get a good return by buying into a declining market ...

In case you found my advice helpful in years past, consider keeping 15% or 30% in crash (freudian slip!) cash.  The S&P 500 is only -16% from it's 52 week high, yet ZROZ is -28%.  If things get worse, both could double or triple those losses.  The only reason I haven't shorted ZROZ is that I found something better.  In your situation, I would sell ZROZ and keep that money in cash.

People say you can't time a crash, but find the flaw in this algorithm:
(1) move 25% to cash, and wait for a crash
(2) wait for mainstream news to announce a stock market crash on every channel
(3) buy

[less4success]

There might be no crash and you’d miss out on gains (and dividends).

[tooqk4u22]

We WILL have a recession, there WILL be no soft landing.  Big tech is laying off, big retailers can't control expenses, amazon and walmart said they are over supplied for labor and warehouses....more layoffs.....but as this happens Fed will change course IF inflation moderates.   Fed messed up badly and was way to late to correct so we will overshoot rates.

Do any layoffs include software engineers?

Netflix stock (NFLX) lost 68% YTD, but their layoffs involved marketing from what I can tell.  While I think big tech has been "de-FANG'ed", with Netflix out of that club, I think it's worth watching if they have additional rounds of layoffs.
https://www.morningstar.com/stocks/xnas/nflx/trailing-returns

Yesterday when asked for a historical comparison to present circumstances, Fed Chair Powell called this a "time of firsts".  He did not refer to the oil crisis of the 1970s, which involved oil supply problems (which should sound familiar) followed by high inflation.  In 1973 stocks dropped 18.18%, versus 18.69% YTD in 2022.  If the comparison holds, we drop another 1/4 or 1/3rd from here.

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

Do i think there is more downside, yup!  But also don't think the markets are too out of whack any more.   Sp 500 could see a downside range of 3400-3600 with a small <5% chance of 3000 and I base that on inflation, pe contraction and earnings coming down to 195-200ish level.

It would also equate to 10% annual rate of return from 12/2018 lows, which kind of "feels" right to me.

[Mr. Green]

We know for sure that bonds are a better buy than they were 6 months or a year ago. Are they a better buy than 6 months or a year from now? Harder to say. I like ChpBstrd's analysis: things can either go way up or way down from here!

I invest in savings bonds plus the riskier corners of the bond market (ZROZ and VWALX) ... For ZROZ, DCA is probably the least effort method to get a good return by buying into a declining market ...

In case you found my advice helpful in years past, consider keeping 15% or 30% in crash (freudian slip!) cash.  The S&P 500 is only -16% from it's 52 week high, yet ZROZ is -28%.  If things get worse, both could double or triple those losses.  The only reason I haven't shorted ZROZ is that I found something better.  In your situation, I would sell ZROZ and keep that money in cash.

People say you can't time a crash, but find the flaw in this algorithm:
(1) move 25% to cash, and wait for a crash
(2) wait for mainstream news to announce a stock market crash on every channel
(3) buy

The flaw would be if there is no crash. A whole lot of people feel pretty bulletproof that this will happen but, well, crazier things have happened.

[vand]

We know for sure that bonds are a better buy than they were 6 months or a year ago.

Only nominally. They may well be a worse buy if your inflation expectations have risen by more than bond yields since then.

Inflation is kryptonite to nominal bonds, and the great mistake that I see is thinking in nominal terms.

In the last year, CPI in the UK went from 4.1% to a 9% print just released today.
The 5yr gilt has gone from 0.3% to 1.6% in that time.

So unless you think that inflation is going to come back down very quickly then bonds are a worse buy than they were a year ago, despite the increase in nominal yields

[habanero]

Only nominally. They may well be a worse buy if your inflation expectations have risen by more than bond yields since then.
...
So unless you think that inflation is going to come back down very quickly then bonds are a worse buy than they were a year ago, despite the increase in nominal yields

While I get your point and partly agree, I don't fully agree. Buying some bond fund now vs say 6 months or a year ago is a better buy even if expected real returns are lower. The drop in price is bigger than any interest accrued in the meantime. You are paying a (much) lower price for pretty much the same future cashflow as you would be entitled to a year ago.

So mostly the assumptions (if any...) made a year ago about future inflation/interest rate turned out to be horribly wrong so far, thus the value of the investment is siginificantly lower today. That one assumed it was a decent buy a year ago doesn't mean much when it turned out it wasn't.

[Radagast]

We know for sure that bonds are a better buy than they were 6 months or a year ago. Are they a better buy than 6 months or a year from now? Harder to say. I like ChpBstrd's analysis: things can either go way up or way down from here!

I invest in savings bonds plus the riskier corners of the bond market (ZROZ and VWALX) ... For ZROZ, DCA is probably the least effort method to get a good return by buying into a declining market ...

In case you found my advice helpful in years past, consider keeping 15% or 30% in crash (freudian slip!) cash.  The S&P 500 is only -16% from it's 52 week high, yet ZROZ is -28%.  If things get worse, both could double or triple those losses.  The only reason I haven't shorted ZROZ is that I found something better.  In your situation, I would sell ZROZ and keep that money in cash.

People say you can't time a crash, but find the flaw in this algorithm:
(1) move 25% to cash, and wait for a crash
(2) wait for mainstream news to announce a stock market crash on every channel
(3) buy

The flaw would be if there is no crash. A whole lot of people feel pretty bulletproof that this will happen but, well, crazier things have happened.

Correct. It's not just if there is a crash, but what if there is a 10% additional crash while the market timer was counting on 20%, when will it be time to get back in? What if the market timer is counting on a 20% crash but it ends up being 50%? Since there is no way to know when the best time to get back in occurs, and since we do not know when the market timer will actually get back in, it turns out that the expected returns between dollar cost averaging and market timing are foreseeably identical. I am guaranteed mediocre returns under all circumstances, whereas market timing may result in mediocre, amazing, or terrible returns but with the same average outcome. However buying the trailing asset every two weeks takes a lot less time and mental strain than attempting to guess the bottom does.

Further consider that ZROZ has been 35%-60% under my target allocation since around September 2020. My spreadsheet says I should have sold something to balance into it long since, but I have only been buying using new money which is defacto market timing compared to my policy.

Further consider that our expected savings rate over the next 12 months amounts to 15%-20% of existing investments in new cash, whereas ZROZ is only around 4% of existing investments (target is 7%).

Essentially we are already doing exactly as MustacheAndAHalf suggests, without doing anything at all.

Demonstration of why regular investing of new money is a great tool for handling a crash, and generally better than market timing:
https://forum.mrmoneymustache.com/welcome-to-the-forum/psa-for-those-able-a-good-time-for-starting-investing/msg2591841/#msg2591841

[PDXTabs]

Other than i-bonds as part of my EF I don't hold any bonds and I don't intend to start anytime soon. I would considering buying a 30 year at 6% or a 10 year at 5%.

[MustacheAndaHalf]

We know for sure that bonds are a better buy than they were 6 months or a year ago. Are they a better buy than 6 months or a year from now? Harder to say. I like ChpBstrd's analysis: things can either go way up or way down from here!

I invest in savings bonds plus the riskier corners of the bond market (ZROZ and VWALX) ... For ZROZ, DCA is probably the least effort method to get a good return by buying into a declining market ...

In case you found my advice helpful in years past, consider keeping 15% or 30% in crash (freudian slip!) cash.  The S&P 500 is only -16% from it's 52 week high, yet ZROZ is -28%.  If things get worse, both could double or triple those losses.  The only reason I haven't shorted ZROZ is that I found something better.  In your situation, I would sell ZROZ and keep that money in cash.

People say you can't time a crash, but find the flaw in this algorithm:
(1) move 25% to cash, and wait for a crash
(2) wait for mainstream news to announce a stock market crash on every channel
(3) buy

The flaw would be if there is no crash. A whole lot of people feel pretty bulletproof that this will happen but, well, crazier things have happened.

Correct. It's not just if there is a crash, but what if there is a 10% additional crash while the market timer was counting on 20%, when will it be time to get back in? What if the market timer is counting on a 20% crash but it ends up being 50%?
 Since there is no way to know when the best time to get back in occurs, and since we do not know when the market timer will actually get back in, it turns out that the expected returns between dollar cost averaging and market timing are foreseeably identical. I am guaranteed mediocre returns under all circumstances, whereas market timing may result in mediocre, amazing, or terrible returns but with the same average outcome. However buying the trailing asset every two weeks takes a lot less time and mental strain than attempting to guess the bottom does.
...
Essentially we are already doing exactly as MustacheAndAHalf suggests, without doing anything at all.

Active investment funds are not allowed to hold much cash - I believe prospectuses require 80% invested in equities, with most managers rarely pushing past 10%.  As one money manager put it, "cash looks awfully good right now, but I don't get paid to be in cash".  Most active funds lose against passive indexing, but the percent beating their index goes up in bear markets.  And I'm doing neither: I'm holding half cash, unlike active or passive funds.

Was it Shakespeare who said "To crash or not to crash, that is the question"?

In the past decade, the worst calendar year performance was -5%.  The chances for a crash aren't normal after the longest bull market in history, the risk is elevated.  And that's before inflation hit 7% and the Fed started acting, which has previously not avoided a recession.  This is a much longer topic, so I'll leave it there.

The most intesting question is how a crash can be timed.  Up above I suggested moving partly to cash, and then buying when the news media reported a crash.  Let me take a wild guess and say that hasn't been studied academically!  But back at the start of April, I bought SPY put options when volatility was at a local minimum.  Put options give me the ability to sell SPY at much higher prices.

I bought put options at various depths, a bit like a 3 stage rocket.  If/when a crash reaches a drop of 1/4th, the first stage ignites or gets sold.  If/when a crash hits 1/3rd in losses, the second stage gets trigged.  Finally, a historically deep crash of 1/2 or more makes the last stage profitable, and I sell that.  The first stage is the largest, just like a rocket.

Note that doesn't just profit on the way down... if the market drops from $4800 to $3200, losing 1/3rd of its value, what happens in a recovery?  Going from $3200 back to $4800 requires a +50% gain - and that's where I buy.  So a passive investor will wait for recovery, while I'll have new money to invest with the potential for larger gains.  Will it work?  Probably, but that's a separate topic.

[MustacheAndaHalf]

We WILL have a recession, there WILL be no soft landing.  Big tech is laying off, big retailers can't control expenses, amazon and walmart said they are over supplied for labor and warehouses....more layoffs.....but as this happens Fed will change course IF inflation moderates.   Fed messed up badly and was way to late to correct so we will overshoot rates.

Do any layoffs include software engineers?

Netflix stock (NFLX) lost 68% YTD, but their layoffs involved marketing from what I can tell.  While I think big tech has been "de-FANG'ed", with Netflix out of that club, I think it's worth watching if they have additional rounds of layoffs.
https://www.morningstar.com/stocks/xnas/nflx/trailing-returns

Yesterday when asked for a historical comparison to present circumstances, Fed Chair Powell called this a "time of firsts".  He did not refer to the oil crisis of the 1970s, which involved oil supply problems (which should sound familiar) followed by high inflation.  In 1973 stocks dropped 18.18%, versus 18.69% YTD in 2022.  If the comparison holds, we drop another 1/4 or 1/3rd from here.

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

Do i think there is more downside, yup!  But also don't think the markets are too out of whack any more.   Sp 500 could see a downside range of 3400-3600 with a small <5% chance of 3000 and I base that on inflation, pe contraction and earnings coming down to 195-200ish level.

It would also equate to 10% annual rate of return from 12/2018 lows, which kind of "feels" right to me.

I'm aware of the storied history of "this time it's different", but some context may help.  I lack a WSJ subscription, so I'm quoting Fed Chair Powell from memory instead of using the transcript below.  But for context, the Fed Chair was asked what historical analogue best fits current conditions.  Chair Powell listed the "once in a century pandemic", a big economy like China in lock down, "a war between two major commodity producers", and historically large Fed & Congressional stimulus.  That was the context for his "time of firsts" (or "era of firsts"?  He said "firsts" referring to the current situation).  Those with a WSJ subscription, I'm literally happy to be corrected - accuracy is more important than ego.
https://www.wsj.com/articles/transcript-fed-chairman-jerome-powell-at-the-wsj-future-of-everything-festival-11652821738

You mentioned markets not being too out of whack, which reminds me of professional money managers on CNBC and Bloomberg TV.  I frequently hear professional money managers talk of reasonable valuations, referring to price/earnings ratio (P/E).  But stocks are slightly above their historical average P/E!  So my interpretation of their view would be "stocks are always above average", which is nutty math.  An average means half below and half above!  You can't just hit a historical average and stop - that, by definition, is not an average.

You have retail investors who have never see a down year greater than 5% (in the past decade), professional investors saying stocks won't go below average, and yet bearish investors are still a minority - even in a bear market!  By bearish investor I mean someone who remains consistently bearish for weeks, even on up days in the market.

[ChpBstrd]

I suspect we're in a shallow recession right now. You heard it here first:

1) Consumer confidence is tanking.
2) Inventories have risen above even the pre-pandemic trendline.
3) A couple of people in my personal orbit have been laid off unexpectedly, and I don't recall such a thing happening for a long time.
4) Our GDP / consumer spending comparison point is the "adrenaline-fentayl" time of 2021 when payments were arriving via direct deposit from the treasury, and the consumer savings rate has fallen below pre-pandemic levels, because the stimmie checks are all spent! How is 2022 going to beat that?
5) The unemployment rate is too low for businesses to grow any further. Where are the employees going to come from to expand operations?
6) Increases in the price of gasoline of the magnitude we've seen in the past 12 months have historically caused recessions.
7) 68% of CEOs in a just-completed survey expect a recession.

Remember, it's not always obvious when one is in a recession. The Q1 GDP numbers surprised everyone. Unemployment doesn't usually spike until 6 months to a year later. If the 2Q 2022 numbers indicate a recession is occurring, it is very unclear to me what the Fed will do. Will they hold off on aggressive rate hikes, as they did after the December 2018 incident, and hope for the recession to kill inflation for them, or will they dismiss the recession and plow on toward their "neutral" rate to ensure stagflation doesn't set in, even as the job losses mount?

If there is an earlier-than-everyone-expects recession, it might cause a stock rally later this year because many traders will decide the recession takes the risk of higher-than-expected rates off the table.

[tooqk4u22]

We WILL have a recession, there WILL be no soft landing.  Big tech is laying off, big retailers can't control expenses, amazon and walmart said they are over supplied for labor and warehouses....more layoffs.....but as this happens Fed will change course IF inflation moderates.   Fed messed up badly and was way to late to correct so we will overshoot rates.

Do any layoffs include software engineers?

Netflix stock (NFLX) lost 68% YTD, but their layoffs involved marketing from what I can tell.  While I think big tech has been "de-FANG'ed", with Netflix out of that club, I think it's worth watching if they have additional rounds of layoffs.
https://www.morningstar.com/stocks/xnas/nflx/trailing-returns

Yesterday when asked for a historical comparison to present circumstances, Fed Chair Powell called this a "time of firsts".  He did not refer to the oil crisis of the 1970s, which involved oil supply problems (which should sound familiar) followed by high inflation.  In 1973 stocks dropped 18.18%, versus 18.69% YTD in 2022.  If the comparison holds, we drop another 1/4 or 1/3rd from here.

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

Do i think there is more downside, yup!  But also don't think the markets are too out of whack any more.   Sp 500 could see a downside range of 3400-3600 with a small <5% chance of 3000 and I base that on inflation, pe contraction and earnings coming down to 195-200ish level.

It would also equate to 10% annual rate of return from 12/2018 lows, which kind of "feels" right to me.

I'm aware of the storied history of "this time it's different", but some context may help.  I lack a WSJ subscription, so I'm quoting Fed Chair Powell from memory instead of using the transcript below.  But for context, the Fed Chair was asked what historical analogue best fits current conditions.  Chair Powell listed the "once in a century pandemic", a big economy like China in lock down, "a war between two major commodity producers", and historically large Fed & Congressional stimulus.  That was the context for his "time of firsts" (or "era of firsts"?  He said "firsts" referring to the current situation).  Those with a WSJ subscription, I'm literally happy to be corrected - accuracy is more important than ego.
https://www.wsj.com/articles/transcript-fed-chairman-jerome-powell-at-the-wsj-future-of-everything-festival-11652821738

You mentioned markets not being too out of whack, which reminds me of professional money managers on CNBC and Bloomberg TV.  I frequently hear professional money managers talk of reasonable valuations, referring to price/earnings ratio (P/E).  But stocks are slightly above their historical average P/E!  So my interpretation of their view would be "stocks are always above average", which is nutty math.  An average means half below and half above!  You can't just hit a historical average and stop - that, by definition, is not an average.

You have retail investors who have never see a down year greater than 5% (in the past decade), professional investors saying stocks won't go below average, and yet bearish investors are still a minority - even in a bear market!  By bearish investor I mean someone who remains consistently bearish for weeks, even on up days in the market.

I disagree that there weren't bad times.....ummm,

WW1 followed immediately by flue pandemic.

Great Depression followed immediately by WW2

Vietnam war combined with energy crisis and crippling stagflation

An so on....


Powell is an extremely intelligent moron who can't admit they f'ed up.   This time is different!

And I consider myself bearish and it's reflected in my AA but when I say markets aren't too far out of whack it means I think they still have room to fall as I outlined.   I also do think that multiples/valuations in the last two decades and going forward were, are, and will be higher than the full average of all history due to different definitions of earnings, acceptance by broader investment class (think 401k, IRA, individual accounts),  and yes lower interest rates (which are still really low by historical standards but not by the last couple years)

Like I said, SP500 earnings estimates won't hold up and I think there is another 10-15% down from here.   

[MustacheAndaHalf]

We WILL have a recession, there WILL be no soft landing.  Big tech is laying off, big retailers can't control expenses, amazon and walmart said they are over supplied for labor and warehouses....more layoffs.....but as this happens Fed will change course IF inflation moderates.   Fed messed up badly and was way to late to correct so we will overshoot rates.

Do any layoffs include software engineers?

Netflix stock (NFLX) lost 68% YTD, but their layoffs involved marketing from what I can tell.  While I think big tech has been "de-FANG'ed", with Netflix out of that club, I think it's worth watching if they have additional rounds of layoffs.
https://www.morningstar.com/stocks/xnas/nflx/trailing-returns

Yesterday when asked for a historical comparison to present circumstances, Fed Chair Powell called this a "time of firsts".  He did not refer to the oil crisis of the 1970s, which involved oil supply problems (which should sound familiar) followed by high inflation.  In 1973 stocks dropped 18.18%, versus 18.69% YTD in 2022.  If the comparison holds, we drop another 1/4 or 1/3rd from here.

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

Do i think there is more downside, yup!  But also don't think the markets are too out of whack any more.   Sp 500 could see a downside range of 3400-3600 with a small <5% chance of 3000 and I base that on inflation, pe contraction and earnings coming down to 195-200ish level.

It would also equate to 10% annual rate of return from 12/2018 lows, which kind of "feels" right to me.

I'm aware of the storied history of "this time it's different", but some context may help.  I lack a WSJ subscription, so I'm quoting Fed Chair Powell from memory instead of using the transcript below.  But for context, the Fed Chair was asked what historical analogue best fits current conditions.  Chair Powell listed the "once in a century pandemic", a big economy like China in lock down, "a war between two major commodity producers", and historically large Fed & Congressional stimulus.  That was the context for his "time of firsts" (or "era of firsts"?  He said "firsts" referring to the current situation).  Those with a WSJ subscription, I'm literally happy to be corrected - accuracy is more important than ego.
https://www.wsj.com/articles/transcript-fed-chairman-jerome-powell-at-the-wsj-future-of-everything-festival-11652821738

You mentioned markets not being too out of whack, which reminds me of professional money managers on CNBC and Bloomberg TV.  I frequently hear professional money managers talk of reasonable valuations, referring to price/earnings ratio (P/E).  But stocks are slightly above their historical average P/E!  So my interpretation of their view would be "stocks are always above average", which is nutty math.  An average means half below and half above!  You can't just hit a historical average and stop - that, by definition, is not an average.

You have retail investors who have never see a down year greater than 5% (in the past decade), professional investors saying stocks won't go below average, and yet bearish investors are still a minority - even in a bear market!  By bearish investor I mean someone who remains consistently bearish for weeks, even on up days in the market.

I disagree that there weren't bad times.....ummm,

WW1 followed immediately by flue pandemic.

Great Depression followed immediately by WW2

Vietnam war combined with energy crisis and crippling stagflation

An so on....


Powell is an extremely intelligent moron who can't admit they f'ed up.   This time is different!

And I consider myself bearish and it's reflected in my AA but when I say markets aren't too far out of whack it means I think they still have room to fall as I outlined.   I also do think that multiples/valuations in the last two decades and going forward were, are, and will be higher than the full average of all history due to different definitions of earnings, acceptance by broader investment class (think 401k, IRA, individual accounts),  and yes lower interest rates (which are still really low by historical standards but not by the last couple years)

Like I said, SP500 earnings estimates won't hold up and I think there is another 10-15% down from here.

When you say valuations will be higher than in the past, would you agree that is a form of "this time it's different?"  One of my biggest criticisms with professional money managers is this idea of fair valuations, or normal P/E ratios.  Yes, P/E ratios are near their historical average... but that's not what average means.  It means half the time P/E values should be below the historical average.  I seem to be on my own with this view, so I'd like to understand other perspectives on it.

We might be going through a combination of 1970s oil embargo + Vietnam war, with 2000s dot-com crash for unprofitable tech stocks.  But the Vietnam war was far less significant to the world economy than Russia's invasion of Ukraine.  Germany was split into East and West back then, and did not import most of it's energy from behind the Iron Curtain.  Now democratic countries depend on Russian oil & gas, and have a problem switching suppliers.  Same with wheat, which is leading to food shortages especially in the Middle East (because what we need most is instability in the Middle East to add to everything else...)

Fed Chair Powell did admit "inflation was transitory" was wrong, but I think he's in a very difficult situation.  I listened to most (joined late?) of his Q&A from Tuesday (WSJ Future of Everything), and nothing conflicted with my view of markets.  I think he simply has to guide markets slowly more negative, and is hiding behind the Fed being "data driven" in the meantime.  He explicitly said the Fed has to see inflation controlled before they stop raising rates, which I interpret to mean rate hikes in 2023.

I noticed the labor participation rate was low awhile ago, but couldn't put that in context or figure out why.  On Tuesday, Powell mentioned it specifically and mentioned the drop in immigration as a factor.  So there's a constantly aging population, which makes the workforce shrink - but then immigration makes up for the gap.  With lower immigration, the gap grows - so the low labor force participation rate is driven by lower immigration, which is a factor (not the only one) in higher than normal job openings.

[Villanelle]

Since they could go up, they could go down, or they could stagnate, it seems to me like you need to ask this question of yourself and answer in a way that is essentially agnostic to current market conditions.  If you think your AA needs to include bonds, start buying them.  If not, don't. 

Otherwise, it's just another form or market-timing.  Ask OldTimer how well that worked for him.  (Hint:  he won't answer because he no longer posts, but you can find his thread.)

[tooqk4u22]

When you say valuations will be higher than in the past, would you agree that is a form of "this time it's different?"  One of my biggest criticisms with professional money managers is this idea of fair valuations, or normal P/E ratios.  Yes, P/E ratios are near their historical average... but that's not what average means.  It means half the time P/E values should be below the historical average.  I seem to be on my own with this view, so I'd like to understand other perspectives on it.

Actually I don't bc the higher valuations have occurred over 30 years not just recent past.   See chart for full history of PE with 10, 20, 30 yr rolling averages - you can clearly see that the last 30 years or so the avg PE has been higher than the 100+ years before that.  A lot of it is due taxes (think 90% at one point), liquidity (50 or more years ago the masses couldn't invest in the markets - today many still don't but they can although there is still 401k going in).

Fed Chair Powell did admit "inflation was transitory" was wrong, but I think he's in a very difficult situation.  I listened to most (joined late?) of his Q&A from Tuesday (WSJ Future of Everything), and nothing conflicted with my view of markets.  I think he simply has to guide markets slowly more negative, and is hiding behind the Fed being "data driven" in the meantime.  He explicitly said the Fed has to see inflation controlled before they stop raising rates, which I interpret to mean rate hikes in 2023.

I noticed the labor participation rate was low awhile ago, but couldn't put that in context or figure out why.  On Tuesday, Powell mentioned it specifically and mentioned the drop in immigration as a factor.  So there's a constantly aging population, which makes the workforce shrink - but then immigration makes up for the gap.  With lower immigration, the gap grows - so the low labor force participation rate is driven by lower immigration, which is a factor (not the only one) in higher than normal job openings.

He admitted transitory was wrong way way way later than when it was wrong.   And now he is slow playing hot inflation and is still wrong.   I am a simpleton and if I called it then the fed should have been able to.   I have documented history in this forum and started a thread back in January 2021 saying just that   Gov't is lying, there is Inflation - Rates will rise when Fed loses control!  I am sure there are other posts.  Again you didn't need to be a rocket scientist to see this coming but outcomes could have been different or more methodical such as selling of bond holdings in smaller batches 1.5 years ago while keeping short term rates lower.   And here we are again being behind the curve. 75bps is off the table - yeah right, absolutely not - that will be the next shock.  Again for the record I have also said that the bond balance sheet is the problem, should never have done that much, should have stopped buying sooner, should have started selling sooner, should be selling more now....but FED doesn't get it.

Anyway, back to bond topic I have an AA that includes bonds.  But I am opportunistic (call it market timing) within the AA.   When FED dropped rates to zero and bought bonds driving long term rates to zero I sold out of all duration and moved all bond AA to cash/ultra short bonds/short bonds (its also documented somewhere in this forum) so while bonds overall have got hammered recently my bond AA has not suffered as badly.  Just like in November 2021 I didn't like that mega tech values occupied so much of the SP 500 at such high valuations - so I shifted a large part to value. That part is down 6% since then vs 17% for SP500 and the dividend was twice as much.  Some of that has now gone back.

[MustacheAndaHalf]

When you say valuations will be higher than in the past, would you agree that is a form of "this time it's different?"  One of my biggest criticisms with professional money managers is this idea of fair valuations, or normal P/E ratios.  Yes, P/E ratios are near their historical average... but that's not what average means.  It means half the time P/E values should be below the historical average.  I seem to be on my own with this view, so I'd like to understand other perspectives on it.

Actually I don't bc the higher valuations have occurred over 30 years not just recent past.   See chart for full history of PE with 10, 20, 30 yr rolling averages - you can clearly see that the last 30 years or so the avg PE has been higher than the 100+ years before that.  A lot of it is due taxes (think 90% at one point), liquidity (50 or more years ago the masses couldn't invest in the markets - today many still don't but they can although there is still 401k going in).

The past 10 years have been 100% bull market, including 2019-2021 with +20%/performance a year.  I wouldn't include only a bull market, so that excludes the 10 year P/E.

I believe new accounting rules were introduced between the dot-com crash and 2008 crisis, and those rules altered the calculation of earnings.  I guess that also comes out in the drop after the dot-com bubble, which didn't return to historical average P/E values even after a second crash in the 2008 crisis.  I'll look for more data on historical P/E, since it's relevant to my thesis.
https://www.multpl.com/s-p-500-pe-ratio

A more disturbing picture is Shiller P/E ratio, which divides 10 years of earnings by the stock price.  Here, the 3 most excessive Schiller P/E peaks are the dot-com crash, now, and the great depression.  If we're currently lumped in with two of the most severe crashes of all time, it might be a good time to reconisder bullishness.  I don't rely on Schiller P/E exclusively, but when it aligns with other signals that strenghens my thesis.
https://www.multpl.com/shiller-pe

[MustacheAndaHalf]

Fed Chair Powell did admit "inflation was transitory" was wrong, but I think he's in a very difficult situation.  I listened to most (joined late?) of his Q&A from Tuesday (WSJ Future of Everything), and nothing conflicted with my view of markets.  I think he simply has to guide markets slowly more negative, and is hiding behind the Fed being "data driven" in the meantime.  He explicitly said the Fed has to see inflation controlled before they stop raising rates, which I interpret to mean rate hikes in 2023.

I noticed the labor participation rate was low awhile ago, but couldn't put that in context or figure out why.  On Tuesday, Powell mentioned it specifically and mentioned the drop in immigration as a factor.  So there's a constantly aging population, which makes the workforce shrink - but then immigration makes up for the gap.  With lower immigration, the gap grows - so the low labor force participation rate is driven by lower immigration, which is a factor (not the only one) in higher than normal job openings.

He admitted transitory was wrong way way way later than when it was wrong.   And now he is slow playing hot inflation and is still wrong.   I am a simpleton and if I called it then the fed should have been able to.   I have documented history in this forum and started a thread back in January 2021 saying just that   Gov't is lying, there is Inflation - Rates will rise when Fed loses control!  I am sure there are other posts.  Again you didn't need to be a rocket scientist to see this coming but outcomes could have been different or more methodical such as selling of bond holdings in smaller batches 1.5 years ago while keeping short term rates lower.   And here we are again being behind the curve. 75bps is off the table - yeah right, absolutely not - that will be the next shock.  Again for the record I have also said that the bond balance sheet is the problem, should never have done that much, should have stopped buying sooner, should have started selling sooner, should be selling more now....but FED doesn't get it.

Anyway, back to bond topic I have an AA that includes bonds.  But I am opportunistic (call it market timing) within the AA.   When FED dropped rates to zero and bought bonds driving long term rates to zero I sold out of all duration and moved all bond AA to cash/ultra short bonds/short bonds (its also documented somewhere in this forum) so while bonds overall have got hammered recently my bond AA has not suffered as badly.  Just like in November 2021 I didn't like that mega tech values occupied so much of the SP 500 at such high valuations - so I shifted a large part to value. That part is down 6% since then vs 17% for SP500 and the dividend was twice as much.  Some of that has now gone back.

My layperson guess is a 0.75% rate hike in September.  The market will have enough time to see that inflation is not falling quickly, plus that allows time between September and mid-term elections to avoid political interference.  But the Fed has been too slow, so I could believe a 0.75% rate hike too late, in December.

I believe the worst performing broad asset categories are growth stocks and long duration bonds.  If you look at Vanguard Value (VTV) versus Vanguard Growth (VUG), growth is down about -30% while value is only -8%.

In bond markets, there's treasury bonds (value?) versus high yield "junk" bonds (growth).  After bond yields go much higher and a recession looks likely, I need to switch investments.  One interesting area could be shorting junk bonds, if I can find a way to do that with limited risk.  I think markets have been lulled into complacency over default risk, and could give cheap prices on someone who spots that risk early.

[ChpBstrd]

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

I think "this time is the same" in the sense that the recent past was a "this time is different" era, and now we are reverting back toward more typical valuations.

ZIRP, massive QE, and trillions of dollars in stimulus occurred in 2020, 2021, and the first quarter of 2022. Those days are gone. Now we're at zero QE and about to start QT, zero stimulus, and rates are set to rise at a rate of at least 0.5% every two months for the foreseeable future.

The average person does not understand the linkage between the risk free rate and stock valuations, because they've never been trained in discounted cash flow methods. If we're going from a "different" world with 2-3% 10-year treasury yields and stimulus to a "this time is the same" world with 5-6% treasury yields, then we also need to accept we're going from a "different" world where to S&P500's PE ratio is in the 20's or 30's to a world where the S&P500's PE ratio is in the mid-teens. According to multpl.com, the average 10-year yield was 4.5% and the average PE ratio was 16. If you expect 10y yields near 4.5% you should also expect a PE ratio around 16.

The S&P would have to fall 21% more just to get to its long-term average PE, net of changes in earnings. And so far earnings have not been so good, even at discounters like TGT. If rate hikes lead to a recession, that will mean falling earnings and even lower valuations. When that happens, it'll be another "this time is the same" in the sense that it may be a buying opportunity, just as recessions usually are.

[ChpBstrd]

One interesting area could be shorting junk bonds, if I can find a way to do that with limited risk.  I think markets have been lulled into complacency over default risk, and could give cheap prices on someone who spots that risk early.

How about long puts or bear spreads on HYG or JNK?

[MustacheAndaHalf]

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

I think "this time is the same" in the sense that the recent past was a "this time is different" era, and now we are reverting back toward more typical valuations.

Could you fix this quote?
I didn't say the quoted text, that was from a post by tooqk4u22.

"Time of firsts" is the same as "this time is different" ...there are always new elements and differences but also similarities.   This time it is Fed induced super shot of adrenaline/fentanyl cocktail that got us way higher than we could ever imagined causing a whole bunch of good companies to become way overvalued and whole bunch of innovationoriented early stage vc crappy companies to come to market at .com valuations.

[MustacheAndaHalf]

One interesting area could be shorting junk bonds, if I can find a way to do that with limited risk.  I think markets have been lulled into complacency over default risk, and could give cheap prices on someone who spots that risk early.

How about long puts or bear spreads on HYG or JNK?

The factors I view as most risky in this environment are:
* high yield
* emerging market
* long-term

When I found two of those factors together, I couldn't pass it up.  I've opened a small short position on iShares J.P. Morgan EM High Yield Bond ETF (EMHY) just now.  This also complements other bear investments on long-term bonds.

It's possible buying puts on a high-yield bond fund would be more profitable.  You could also look at international high yield bond ETFs.  Here's etfdb's list:
https://etfdb.com/etfdb-category/high-yield-bonds/

[ChpBstrd]

One interesting area could be shorting junk bonds, if I can find a way to do that with limited risk.  I think markets have been lulled into complacency over default risk, and could give cheap prices on someone who spots that risk early.

How about long puts or bear spreads on HYG or JNK?

The factors I view as most risky in this environment are:
* high yield
* emerging market
* long-term

When I found two of those factors together, I couldn't pass it up.  I've opened a small short position on iShares J.P. Morgan EM High Yield Bond ETF (EMHY) just now.  This also complements other bear investments on long-term bonds.

It's possible buying puts on a high-yield bond fund would be more profitable.  You could also look at international high yield bond ETFs.  Here's etfdb's list:
https://etfdb.com/etfdb-category/high-yield-bonds/

I had just entered a bear spread on HYG with 47% potential upside an hour before reading this. Who’s buying a 4.6% yield on junk when treasuries will be yielding that by EOY?

Let’s hope the PCE numbers due out next Friday are bad. The market consensus is for a big improvement but I just don’t see that happening when oil, the CRB index, the GSCI index, and the Baltic fry index all went up in the past 30d. Who does the market think ate those costs?

[Radagast]

We know for sure that bonds are a better buy than they were 6 months or a year ago.

Only nominally. They may well be a worse buy if your inflation expectations have risen by more than bond yields since then.

Inflation is kryptonite to nominal bonds, and the great mistake that I see is thinking in nominal terms.

In the last year, CPI in the UK went from 4.1% to a 9% print just released today.
The 5yr gilt has gone from 0.3% to 1.6% in that time.

So unless you think that inflation is going to come back down very quickly then bonds are a worse buy than they were a year ago, despite the increase in nominal yields

It is one of those foresight/hindsight things. It is true that 6 or 12 months ago I expected long term bonds to return 0 after inflation, +/- 20% annual standard deviation of returns. As of today that is still my expectation, so in that sense nothing has changed. But in hindsight, a serious adjustment happened to the price of bonds since my older expectation. With hindsight, we know for certain than bonds are a better buy than they used to be, but we still don't know what the best future opportunity will be.

[waltworks]

For reference, those folks concerned with P/E ratios may want to consider that there have been considerable changes in both GAAP accounting rules (stricter, basically) and corporate behavior (more buybacks in lieu of dividends) in the last 30 years or so.

There's plenty of debate about these issues but I think many people would agree that comparing today's P/E ratios (or CAPE, or whatever version you like best) to those from the 1980s and earlier is probably a bit misleading. My personal feeling is that P/E or CAPE around 20 is comparable to the pre-90s ratios in the mid/high teens.

Low cost indexing also brought in a lot of new money/investors in the last 30 years, so I also hear people argue that the new normal is P/E's in the low or mid 20s for that reason.

Of course, I am not offering actual investment advice here. YMMV.

-W

[MustacheAndaHalf]

One interesting area could be shorting junk bonds, if I can find a way to do that with limited risk.  I think markets have been lulled into complacency over default risk, and could give cheap prices on someone who spots that risk early.

How about long puts or bear spreads on HYG or JNK?

The factors I view as most risky in this environment are:
* high yield
* emerging market
* long-term

When I found two of those factors together, I couldn't pass it up.  I've opened a small short position on iShares J.P. Morgan EM High Yield Bond ETF (EMHY) just now.  This also complements other bear investments on long-term bonds.

It's possible buying puts on a high-yield bond fund would be more profitable.  You could also look at international high yield bond ETFs.  Here's etfdb's list:
https://etfdb.com/etfdb-category/high-yield-bonds/

I had just entered a bear spread on HYG with 47% potential upside an hour before reading this. Who’s buying a 4.6% yield on junk when treasuries will be yielding that by EOY?

Let’s hope the PCE numbers due out next Friday are bad. The market consensus is for a big improvement but I just don’t see that happening when oil, the CRB index, the GSCI index, and the Baltic fry index all went up in the past 30d. Who does the market think ate those costs?

I read about the difference between PCE and CPI inflation in this 8 year old article.
https://www.clevelandfed.org/newsroom-and-events/publications/economic-trends/2014-economic-trends/et-20140417-pce-and-cpi-inflation-whats-the-difference.aspx

This year inflation and yields have gone up.  The surprised left TIPS down a tiny amount, not up.  Commodities ETFs (GSCI index like you mention) are up over 30%, making them a better choice for rising inflation.  I bought "no K-1" commodity ETFs on Friday, and plan to increase those positions: commodities should hold up better than cash or bonds.

[maizefolk]

For reference, those folks concerned with P/E ratios may want to consider that there have been considerable changes in both GAAP accounting rules (stricter, basically) and corporate behavior (more buybacks in lieu of dividends) in the last 30 years or so.

Agreed. If you look at the PE10/ShillerPE, from 1870-1995 it only ever was above 25 for one brief window in 1929 right before the great depression.

Since 1995 the same metric has been above 25 more than half the time, and only only came close to pre-1995 average (~15) at the very bottom of the global financial crisis.

[MustacheAndaHalf]

...  I've opened a small short position on iShares J.P. Morgan EM High Yield Bond ETF (EMHY) just now.

Emerging market countries produce the commodities that are in demand, which is a weak spot in that idea.  I've also found something better to short.

I've closed the EMHY short position.

[jpdx]

So there's a decent chance bonds will continue lose value, stocks will crash further, and cash will erode to inflation. Not ideal situation for early retirees.

[waltworks]

Some of us loaded up on iBonds.

Panicking is always an option too, though!

-W

[MustacheAndaHalf]

For reference, those folks concerned with P/E ratios may want to consider that there have been considerable changes in both GAAP accounting rules (stricter, basically) and corporate behavior (more buybacks in lieu of dividends) in the last 30 years or so.

Agreed. If you look at the PE10/ShillerPE, from 1870-1995 it only ever was above 25 for one brief window in 1929 right before the great depression.

Since 1995 the same metric has been above 25 more than half the time, and only only came close to pre-1995 average (~15) at the very bottom of the global financial crisis.

That's worth examining further, especially breaking up the data based on significant accounting changes.  On financial news I keep hearing U.S. P/E ratios near 20, with international P/E ratios in the teens.

https://www.morningstar.com/etfs/xmex/vti/portfolio
https://www.morningstar.com/etfs/xnas/vxus/portfolio
Morningstar shows P/E ratios of 17.05 for VTI (U.S.) and 12.03 for VXUS (int'l).

https://etfdb.com/etf/VXUS/#etf-ticker-valuation-dividend
https://etfdb.com/etf/VTI/#etf-ticker-valuation-dividend
Etfdb shows P/E ratios of 23.40 VTI and 11.30 VXUS

I suspect the etfdb numbers are off, but even the Morningstar data shows about a 1.5x gap between international and U.S. P/E values.  Unfortunately this is going to make it even more unpleasant when I hear someone on financial TV talking about fair valuations for U.S. stocks.  Even worse, their incentive is to say something different and interesting so they keep getting invited to talk on TV.  So mere days of upswing is enough to move the conversation - but at least I'll figure out if the market is herding into this new belief or if most aren't buying it (literally).

[maizefolk]

Just to clarify the PE10 is looking at current prices divided by the average earnings over the past ten years.

The P/E being shown places like morning start is looking at current prices divided by current year earnings.

The second will typically be a smaller number than the first because earnings tend to grow over time so the most recent year will usually having above average earnings relative to the last ten years.

[tooqk4u22]

Just to clarify the PE10 is looking at current prices divided by the average earnings over the past ten years.

The P/E being shown places like morning start is looking at current prices divided by current year earnings.

The second will typically be a smaller number than the first because earnings tend to grow over time so the most recent year will usually having above average earnings relative to the last ten years.

PE10 is inflation adjusted earnings from the 10 years, so yes earnings grow but the inflation component is taken out.

[waltworks]

If you're curious about the trend in (again, inflation adjusted) earnings:
https://www.multpl.com/s-p-500-earnings
https://www.multpl.com/s-p-500-earnings/table/by-year

So except in unusual circumstances, the PE/10 measure will be considerably higher than current P/E.

-W