Markets are efficient for the foreseeable future... but with a market drop, after 3-5 years the markets have almost always recovered from that drop. So I guess markets are efficient in the short term, but not in the long term?
That could also explain why there's some correlation (only 0.40) with P/E values and long term performance (10-20 years) of the stock market. Or maybe it's why you don't time the market in the short term, and just make sure you have lots of time in the market long-term.
Markets are efficient, but also irrational. How? My personal view combines a bit of behavioral finance with efficient market theory. The micro decisions, what individual stocks to buy and sell, normally have a lot of thought put into them, but at the macro level markets are made up of millions of people bound by their emotional minds and subject to herd mentality.
Micro example: If you compare Ford, GM, and Toyota you can probably find really good reasons for why each one is priced the way it is compared to the other two. Same goes for Samsung and Apple. How about Chevron, Exxon, and BP?
This makes it very difficult to pick individual stocks and outperform the market.
At the macro level, the markets are made up of millions of investors, who aren't always logical. We know people are really bad at timing. They like to buy when the markets are good and have been going up, and they like to sell when markets are scary and going down. This behavior is very irrational. The best time to buy something is when prices are low(the scary times) and the best time to sell is when prices are high(the good times). The result is that the whole market can get priced high or low compared to the underlying valuations for no apparent logical reason. Looking at the changes in PE ratios over long time periods is a good way to see this relationship.
We can even see politics play into this. Democrats feel better about investing and hold more aggressive AA's when a Democrat is president, and Republicans feel better about investing and hold more aggressive AA's when a Republican is president. However, the long term returns tell us that it doesn't really matter, performance has been about the same regardless of party in charge.
An easy example: The PE ratio has been around 18-22 for almost 6 years, and then after a really calm period(no big drops)
it rises to 25 in about 2 years. Did the companies change, interest rates, growth expectations... or maybe the people who normally stay out of the market felt comfortable coming back and drove the prices up. Then after some mildly bad economic news there is a lot of selling and the PE drops back to 20. Did the economic situation really get that much worse, or maybe the skittish investors who normally stay out got scared and got back out?
Another example: the primary news source for 40% of the population hates the current administration and talks about how terrible the economy is every single day. Then after a change in leadership this news source loves the current administration and talks about how great the economy is. Note, very little time has passed so the economy has barely changed at all. The regular viewers of this new source are getting bombarded with good news everyday about how much the DOW went up and how it's because of their guy being president! This example is real. The news source is Fox, and their average viewer's perception of the economy went from OMG terrible in October 2016 to the best ever by January 2017. We would be foolish to cry ETH and bury out heads in the sand; of course constant reporting of good or bad news can impact people's perceptions.
Can you time this? Not when it's going up. It's always hard to tell how long it will keep going up. How about when it's going down? Well you don't have this information in advance, so waiting in cash is a terrible idea. However, if it's down a good amount from recent highs and you are lucky enough to have some extra cash it's likely a great time to jump in.
