Does anyone else feel like they're treading water?

[vand]

Telling yourself that the you are "buying at a discount" in downturns is a bit silly imo.  Yeah, it's good if you drink the kool aid, but it needs to be slightly more objective than that.

On these pages its take as an article of faith that any downturn in stocks represents a bargain... well, that just ain't so.

Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.

Its worth rewinding a couple of years  to remind ourselves just how euphoric the markets got:

https://www.im.natixis.com/us/research/2021-natixis-global-survey-of-individual-investors

US  Investors were expecting the next 5 year to deliver 17.5% REAL returns off the back of the 17% nominal returns of the previous 5 years and the best decade for risk-adjusted return the stock market has ever had.

A clear sign of a major top, which speaks to how over priced things got.

[ATtiny85]

Telling yourself that the you are "buying at a discount" in downturns is a bit silly imo.  Yeah, it's good if you drink the kool aid, but it needs to be slightly more objective than that.

On these pages its take as an article of faith that any downturn in stocks represents a bargain... well, that just ain't so.

Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.

I don’t tell myself this in advance. I buy equities every month regardless of anything. And when I look back at those times in the past when stocks were “pricey”, they sure seem like a bargain now. Dot com lead up, GFC lead up, and others. I am confident that the $150,000 of VTSAX we bought in December 2021 will also look like a bargain when we need to sell.

[vand]

BTW here is the 2023 version of that Natixis report:
https://www.im.natixis.com/us/resources/2023-individual-investor-survey-full-report

It's noticeable that while internation expectations have moderated considerably down to more sensible expectations somewhat in line with long term historical averages, US investors are still living in cloud cukoo land, as their expectations are only slightly lower (15.4% US).  Overall, investors expect real returns over the next 5 years to be 12.8% from still-expensive valuations.... prepare to continue to be disapoointed.

[EscapeVelocity2020]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

[Wintergreen78]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

Just out of curiosity, do you rebalance or change your contributions based on E/P to bond yield, or any other metrics? Do you actively trade based on any of them?

I don’t disagree with you - some of these measures can probably affect the probability of returns going forward. Personally I don’t actively trade because I think the likelihood I can outperform a buy and hold strategy over the next 40 years is close to zero, but I’m always interested in people who think they can outperform.

[tooqk4u22]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

That's the part that doesn't add up right now.   The estimated 2024 earnings for sp500 is $250 so that is a 17x pe or 5.9% earnings yield.....doesn't seem that great of a premium over the next 12 months assuming the earnings materialize.

Investirs are expecting one or some of the following for it to make sense:
1.  Earnings to grow even greater than $250 and an even higher growth rate in 2025 and beyond.  Seems unlikely given Fed's desire/need to slow down the economy and employment, and consumers are getting tapped out with higher more expensive debt.

2.  The Fed will not only pause but will be rapidly cutting in 2024.  Seems unlikely given still sticky inflation.

3.  The 10 year UST will rollover and decline precipitously in 2024 and beyond.   Seems unlikely due to fed mandate, fewer foreign buyers of treasuries, fewer domestic buyers bc money markets and/short Treasuries give same return without the duration risk that burned bond holders last year and continues to do so, significant supply of treasuries due to excessive spending, and even if they did drop it means that something is wrong like a big recession so #1 would be out the window. 

Flatter for longer or lower for shorter is probably in the cards for the sp500 until complacent investors get scared/washed out such that overall there is some permanent sentiment that 100% equities all the time may not be an appropriate risk position and bonds get back to playing a ballast role in a portfolio.

Don't fight the Fed works both ways and markets/investors are ignoring it. But once it works through this normalization cycle I belive it will be very positive for both equities and bonds thereafter, but it's going to take time. 

[vand]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

That's the part that doesn't add up right now.   The estimated 2024 earnings for sp500 is $250 so that is a 17x pe or 5.9% earnings yield.....doesn't seem that great of a premium over the next 12 months assuming the earnings materialize.

Investirs are expecting one or some of the following for it to make sense:
1.  Earnings to grow even greater than $250 and an even higher growth rate in 2025 and beyond.  Seems unlikely given Fed's desire/need to slow down the economy and employment, and consumers are getting tapped out with higher more expensive debt.

2.  The Fed will not only pause but will be rapidly cutting in 2024.  Seems unlikely given still sticky inflation.

3.  The 10 year UST will rollover and decline precipitously in 2024 and beyond.   Seems unlikely due to fed mandate, fewer foreign buyers of treasuries, fewer domestic buyers bc money markets and/short Treasuries give same return without the duration risk that burned bond holders last year and continues to do so, significant supply of treasuries due to excessive spending, and even if they did drop it means that something is wrong like a big recession so #1 would be out the window. 

Flatter for longer or lower for shorter is probably in the cards for the sp500 until complacent investors get scared/washed out such that overall there is some permanent sentiment that 100% equities all the time may not be an appropriate risk position and bonds get back to playing a ballast role in a portfolio.

Don't fight the Fed works both ways and markets/investors are ignoring it. But once it works through this normalization cycle I belive it will be very positive for both equities and bonds thereafter, but it's going to take time.

Personally I would take forward P/E with a pinch of salt. Unlike a bond yield its far from gauranteed.  These higher interest rates, as well as steepening discount rates acorss the board and lowering PE multiples, will most likely also have the effect of lowering company profits as it makes their debt more expensive to roll over, so they have a double effect.

[mistymoney]

Keep going everyone, you're doing great :-)

"Save like a pessimist, invest like an optimist"

Love it!

really worked for me in 2008

[VanillaGorilla]

It's hard to take PE based arguments too seriously, particularly when people compare current figures to the historical mean. Since I was born the S&P500 PE has been at or below the mean for precisely two years, and yet the market returned a quite excellent 10% CAGR over that same period. If you waited for "fairly priced" equities over the last 30+ years then I've got a bridge to sell you.

History shows that those who hold their nose and invest 50+% of their income into the market consistently reap tremendous rewards on a very palatable timeline. Short of our entire economy behaving massively differently from how it's worked for the last 150 years, the current era will be no different.

[Telecaster]

There is also some evidence that P/E ratios have been secularly rising because retail investors are accepting lower risk premiums for stocks.   But even if that's not true, it doesn't matter.   If P/E is higher than average, that implies lower forward returns than average.   Fair enough, returns have to be below average as least part of the time by definition.   

We also know from history that the market can simply go sideways for long periods of time.   Not seeing your balance increase in a meaningful way for sometimes years at a time is part of the investing experience.

And finally, it still doesn't matter.  Most of us can reasonably expect to live until our 80s.   So for most of us our investing horizon is measured in multiple decades.   A dip or bump here and there just won't matter in the long term. 

[vand]

There is also some evidence that P/E ratios have been secularly rising because retail investors are accepting lower risk premiums for stocks.   But even if that's not true, it doesn't matter.   If P/E is higher than average, that implies lower forward returns than average.   Fair enough, returns have to be below average as least part of the time by definition.   

We also know from history that the market can simply go sideways for long periods of time.   Not seeing your balance increase in a meaningful way for sometimes years at a time is part of the investing experience.

And finally, it still doesn't matter.  Most of us can reasonably expect to live until our 80s.   So for most of us our investing horizon is measured in multiple decades.   A dip or bump here and there just won't matter in the long term.

This is true - a perfectly rational explanation for this could be that stocks are cheaper and easier to own than before with the rise of low lost indexing and low cost platforms... the ordinary investor is more able to easily capture nearly all market returns.  People who say stocks have returned 7% real for the last century conveniently dismiss that it was largely impossible to reliably capture that return for most of that period... today it is both cheap and easy.

But if that is the case then the gains from this be a one-off medium term benefit and the effect will have all but played out by now unless you think fees can go much lower (I can't, personally, fund manager still have to eat).. it may make sense that stocks go from a PE 18 to PE 22 fair value... but not to PE 30 or 40 imo.

[Wolfpack Mustachian]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

What is the alternative for investing, though? Are all of you guys saying it's just overpriced now and will come back down to levels where buying make sense or that buying and holding stocks in the form of index funds is fundamentally going to fail as a future proposition?

[EscapeVelocity2020]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

What is the alternative for investing, though? Are all of you guys saying it's just overpriced now and will come back down to levels where buying make sense or that buying and holding stocks in the form of index funds is fundamentally going to fail as a future proposition?

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

[Scandium]

...
Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.
...

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

Sadly all most investors know is 'buy the dip', which is ignoring why stocks are struggling.  'TINA' investing (there is no alternative) easy mode is over.

What is the alternative for investing, though? Are all of you guys saying it's just overpriced now and will come back down to levels where buying make sense or that buying and holding stocks in the form of index funds is fundamentally going to fail as a future proposition?

I'm sure this always works out great! Just ask all the "PE too damn high!" people in 2012-13 how they've been doing (still) waiting for the drop.. Only a CAGR of 12.74% since then i.e. up ~4x. I'm sure it's the right time to jump in any day now!

bascially: top is in?

[Telecaster]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

[tooqk4u22]

It's hard to take PE based arguments too seriously, particularly when people compare current figures to the historical mean. Since I was born the S&P500 PE has been at or below the mean for precisely two years, and yet the market returned a quite excellent 10% CAGR over that same period. If you waited for "fairly priced" equities over the last 30+ years then I've got a bridge to sell you.

History shows that those who hold their nose and invest 50+% of their income into the market consistently reap tremendous rewards on a very palatable timeline. Short of our entire economy behaving massively differently from how it's worked for the last 150 years, the current era will be no different.

The key detail you are ignoring is that for the last 30 years (and 10, 20, and 40 years except for last 18 months )  theb10 yr UST was falling whereas now rates quickly went up and are back to almost 20 years ago.   

Rates do matter.   Equity risk premiums matter. 

[tooqk4u22]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

PE was around 15 in 2012 and 17 in 2013 so probably not a lot of complaining about high PEs back then, and they would have been lower on a forward looking basis.   2016 and later absolutely.

Again 10 year rates were declining over that period all the way to zero and people forget that the Trump tax cuts affect 16% to earnings in 2018 and beyond (without the cuts earnings would have been low single digits in 2018) - those cuts are one of the many contributing factors to our mess right now inflation, deficits, higher rates.

Maybe we can growour way out of it, in which case rates will stay high and incremental earnings will offset lower PEs and market will stay flatter for longer.

Or rates will go higher, spending will be reduced and/or taxes will be reduced, none of which will be good for markets in the shorter term but probably necessary.   Imagine reversing Trump tax cuts.....boom sp500 down 15% instantly but from that point markets would look really good on a go forward basis.

Or the economy will end up breaking and resetting markets. 

This is probably a 1-2 year churn/slog.

[tooqk4u22]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

This a good point.

[Must_ache]

I don't remember any moaning about high P/E's around 2012. 

You can say historically we will do fine over a long time, but historically we have never lived through such abnormally low interest rates for an entire decade.  Trillions of dollars in bonds for the Feds to unload.  There's nothing historically predictable about this as far as I can tell.  I think assets are still considerably overvalued.   When the lagging effect of higher interest rates takes effect and as there are more delinquincies and it starts to feel recessionary, the E in P/E will go down and the P will come with it.  That's my guess.  I'll take my 5% risk-free yield in this environment as long as I can get it.

 

[Scandium]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

PE was around 15 in 2012 and 17 in 2013 so probably not a lot of complaining about high PEs back then, and they would have been lower on a forward looking basis.   

Most cite the Shiller PE, which was ~21 in 2012. And plenty talk about how this was "unsustainable", crash imminent etc.

But maybe this time it's different? Or was it different that time but not now...? I'm  not sure. 

[mistymoney]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

PE was around 15 in 2012 and 17 in 2013 so probably not a lot of complaining about high PEs back then, and they would have been lower on a forward looking basis.   

Most cite the Shiller PE, which was ~21 in 2012. And plenty talk about how this was "unsustainable", crash imminent etc.

But maybe this time it's different? Or was it different that time but not now...? I'm  not sure.

aka don't time the market...

[EscapeVelocity2020]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

PE was around 15 in 2012 and 17 in 2013 so probably not a lot of complaining about high PEs back then, and they would have been lower on a forward looking basis.   

Most cite the Shiller PE, which was ~21 in 2012. And plenty talk about how this was "unsustainable", crash imminent etc.

But maybe this time it's different? Or was it different that time but not now...? I'm  not sure.

aka don't time the market...

I don't think anyone in this thread was talking about jumping in and out of the SP500 index fund (aka timing), my main point was to look at the broad landscape of investment opportunities and pick up diversifications to hedge against the fact that VOO (P/E 21.2, yield 1.59%) has real competition, like a 12-mo gov bond yielding 5.4%... 

[tooqk4u22]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

PE was around 15 in 2012 and 17 in 2013 so probably not a lot of complaining about high PEs back then, and they would have been lower on a forward looking basis.   

Most cite the Shiller PE, which was ~21 in 2012. And plenty talk about how this was "unsustainable", crash imminent etc.

But maybe this time it's different? Or was it different that time but not now...? I'm  not sure.

aka don't time the market...

I don't think anyone in this thread was talking about jumping in and out of the SP500 index fund (aka timing), my main point was to look at the broad landscape of investment opportunities and pick up diversifications to hedge against the fact that VOO (P/E 21.2, yield 1.59%) has real competition, like a 12-mo gov bond yielding 5.4%...

Long term equities will/should perform better than bonds (unless we turn into japan) but right now there is a resetting going on to wash out the excess of pandemic related spending and a decade of zero rates and QE.   

As EV says there is competition and you can  be paid to wait.

In the last five years to today, sp 500 earnings are up 6.8% annually, sp500 returned 8.6% annually + dividends, and the 10year UST (the primary discounting factor) went from 3.1% to 5%. 

Same pattern is true for the last 35 years when rates started coming down from the 70s inflation era....sp500 earnings grew 6.3% annually, sp 500 returned 8.1% annually plus dividends, while the 10yr ust went from 8.7% in 1988 to 4.8% now.   

Earnings ultimately drive the long term direction of the stock market but rates are instrumental to the difference  between the variance between growth in earnings and growth in values.   

And right now we are in a rising rate environment that anybody under the age of 60 hasn't experienced.   

The question is whether rates go higher and sustained longer.   Personally, I think they can go higher from here but will settle in at the 3.5-4% range after the Fed gets its way in two'ish years timeframe.   I don't feel/think this is like the 70's but who knows.   

As said above, earnings have to grow faster, market has to fall further sooner or stay where it is for longer, and/rates have to fall sooner/faster/farther.   

I am not saying sell your equities, just appreciate the landscape and what are likely outcomes in near and intermediate terms.  Long term it should be fine.

You tell me which is the more likely outcome.   

[Must_ache]

Lots of vague statements about long term this and long term that which don't impress me...

The S&P is down -12.2% from 12/1/2021.  During that time you could have parked your money in something safe and generated at least 8% by now, so fixed income returns (excluding S&P dividends) were 1.08 / 0.878 - 1 = 23% better during this time period.

Ben Stein's book Yes You Can Time The Market is not about going in and out of the market.  It is an enlightening read that shows that the long-term return you get is driven by how expensive stocks are when you initially buy them.  Stocks have had a good overreach but are historically expensive and their unprecedented run with low interest rates as a foundation has been living on borrowed time.  So you can wave your hands and say that in 20 years you'll have generated some sort of acceptable return.  That ignores the fact that you might do much better trimming or avoiding equities altogether in the short term until prices are attractive.  They haven't been attractive in a long time because of interest rates.  Now we are getting bond yields not seen in a long time.

I roll my eyes when prices go down and people say I'm buying more at a cheaper rate.  Yeah, but if you had reason to believe the market would go down, the smart money would SELL now and then buy it again later when the price is lower.  Of course, we don't have perfect knowledge, but I think people justify buying equities at any valuation with this fairy logic.

The S&P was last at its current level around April/May 2021.  That means excluding dividends your S&P investment has returned more or less nothing for the last two and a half years.     

I have loaded up about 20% of my portfolio in bonds and CDs yielding 5-6% of various durations, and I'm looking to double the allocation.  It does feel like we might be done tightening for a while and the Fed should probably pause.  It will take time for the yield curve to uninvert.  The question is how soon does the short-term interest come down a bit, and how much more upside if any on long-term yields.  I'm very tempted to scoop up more 10-yr and 20-yr right now.  When interest rates come down my investment will rise in value.

[Scandium]

Lots of vague statements about long term this and long term that which don't impress me...

The S&P is down -12.2% from 12/1/2021.  During that time you could have parked your money in something safe and generated at least 8% by now, so fixed income returns (excluding S&P dividends) were 1.08 / 0.878 - 1 = 23% better during this time period.

If only I had know this in November 2021! Now I feel stupid.

[mistymoney]

Just for me personally, this has meant a return to my early roots as a 1990's investor where you have to put in the work to pick the best opportunities.  The S&P500 index is no longer defaulting to the top of the list, because it now contains a lot of overpriced equity from all the other investors that have been crowding in to index funds for a decade and are still sitting there not selling.  It isn't the worst option, but there is real competition again, including fixed income.

There is also the element of waiting for bargains, but that could still be a long ways off.

Philosophically, there is nothing magical about the S&P 500 index.   It is basically a large cap strategy.  Which is fine, of course.   But for example, the S&P 500 equal weight index has a PE of 17 vs. 22 for the standard index.   Nasdaq equal weight has a PE of 22 vs. 29 vs. the cap weighted index.

I'm not saying to chase PE, but the higher valuations are concentrated in the large caps at the moment.   

PE was around 15 in 2012 and 17 in 2013 so probably not a lot of complaining about high PEs back then, and they would have been lower on a forward looking basis.   

Most cite the Shiller PE, which was ~21 in 2012. And plenty talk about how this was "unsustainable", crash imminent etc.

But maybe this time it's different? Or was it different that time but not now...? I'm  not sure.

aka don't time the market...

I don't think anyone in this thread was talking about jumping in and out of the SP500 index fund (aka timing), my main point was to look at the broad landscape of investment opportunities and pick up diversifications to hedge against the fact that VOO (P/E 21.2, yield 1.59%) has real competition, like a 12-mo gov bond yielding 5.4%...

day or short term trading and timing the market are not synonyms.

[grantmeaname]

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

I have never liked this argument. Bonds offer nominal returns and corporate profits are effectively inflation-adjusted, so the spread between the two should be stable-ish and the test works intuitively in a period of stable inflation. You could reasonably compare the yield spread in 2012 and 2019, and even compare it to recent history, but the relationship should have broken down when inflation went from a stable 2% to a peaky 9% and then back on its way down to 4% or so. You should be much happier to own an inflation-adjusted 6% yield today than a nominal 5% yield, and the relationship between the two should be different than it was in 2019.

[grantmeaname]

The S&P is down -12.2% from 12/1/2021.  During that time you could have parked your money in something safe and generated at least 8% by now, so fixed income returns (excluding S&P dividends) were 1.08 / 0.878 - 1 = 23% better during this time period.

What are you smoking? The whole melt-off of the market since its peak has been due to the increase in bond yields and concomitant decline in bond prices. There's a certificate of deposit or 2-year bond you could have bought in Dec 2021 that would yield you a safe 8% over 2 years or 4%/year? Savings accounts yielded 0.06% in December 2021, 2-year CDs yielded 0.4%, and a 2-year treasury yielded 0.56%. What about longer-term instruments? If you bought anything other than a CD or a bond that matured, you suffered the repricing of the security lower in the new higher-rate world - VBLTX is down 21% since Dec 2021.

Stocks have had a good overreach but are historically expensive and their unprecedented run with low interest rates as a foundation has been living on borrowed time.  So you can wave your hands and say that in 20 years you'll have generated some sort of acceptable return.  That ignores the fact that you might do much better trimming or avoiding equities altogether in the short term until prices are attractive.

Telling yourself that the you are "buying at a discount" in downturns is a bit silly imo.  Yeah, it's good if you drink the kool aid, but it needs to be slightly more objective than that.

On these pages its take as an article of faith that any downturn in stocks represents a bargain... well, that just ain't so.

Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.

Feels like you're 18 months behind, man. The market is quite reasonable after the last 18 months of poor price returns and strong earnings growth. It's no more than one standard deviation above normal on every meaningful valuation metric (and note this is as of September 30th, when the S&P was 120 points higher than it is now, so these valuations have actually declined some more). On Shiller P/E, it's now only one turn above normal, despite reasons to believe that Shiller PE is getting secularly more expensive.


(image is slide 5 from the superb JPM Guide to Markets)

[Must_ache]

OK I take back the 8% comment.  I know I can get 5%+/yr now but forgot how recent a phenomenon that was.  It wasn't realistic to get that for the last year and a half.

The P/E of the S&P is currently around 24, worlds apart from the forward P/E of 18.  That seems to imply that in the next 12 months either earnings are going way up or prices are going way down (or a mixture of both)?   

[grantmeaname]

24x sounds like a data error to me. If you eyeball slide 8 of the JPM Guide to Markets, it looks like the trailing year's S&P 500 earnings is around $215 (10/12*~$220 + 2/12*~$190), which at an S&P 500 value of $4,200 is a trailing P/E of 19.5x.

That said, trailing P/E is totally irrelevant IMO. No sophisticated institutional stock market participant uses it for much (source: day job). Whatever a company earned last year is already reflected in its current share price and those profits have already been reinvested, used to pay down debt, or paid out as a dividend/buyback. What matters is the stream of earnings you are going to get starting the day you buy the stock - the next year, and the stream of years following that.

[ChpBstrd]

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

I have never liked this argument. Bonds offer nominal returns and corporate profits are effectively inflation-adjusted, so the spread between the two should be stable-ish and the test works intuitively in a period of stable inflation. You could reasonably compare the yield spread in 2012 and 2019, and even compare it to recent history, but the relationship should have broken down when inflation went from a stable 2% to a peaky 9% and then back on its way down to 4% or so. You should be much happier to own an inflation-adjusted 6% yield today than a nominal 5% yield, and the relationship between the two should be different than it was in 2019.

Counterpoint:
Even at the height of the recent bout of inflation, markets never expected inflation to stick around. Expected 5-year average inflation only peeked above 3% for a short time in late 2021 and early 2022. Overall we're very near the levels typical of the past 20 years:

That's not to say a DCF spreadsheet won't assign a higher present value to stocks due to their cash flow growth. Stock should have a higher E/Y than the bond's yield because of growth. The questions are: (a) how much higher is fair, and (b) at what growth rate?

Growth projections are absolute guesswork. Who could have predicted the US's GDP growth this quarter would exactly match China's at 4.9%, but here we are!

[Must_ache]

I think you are right, I need a good source of up-to-the-minute P/E's , too many of them are dated.

[grantmeaname]

The 'right' way to get it is a ton of work - for each company, the analyst consensus EPS growth is used to produce the consensus P/E for the stock, then a team takes the weighted average of all the stocks in the whole index/market, and then corrections are made for data errors and companies with no P/E. Not really feasible for even a sophisticated single investor to do that work just to get a sense for where the market is at - much more often they take last year's reported earnings and say 'smells like 5% growth out there' and produce a number that way.

[mistymoney]

I have 2 things to say!

1- I have noticed the trend for market timing making a larger and larger presense on this board over the past year-two. Which is fine! But my worry is that less experienced investors are going to read all these rationalizations for doing so and try to follow along without understanding the implications. The tone of these posts isn't casual "I'm doing this...", but persuasive with the tenet that this is the only logical choice right now. That some people are timing the market and even resist the label of timing the market is kind of a concern!

2 - When the market moves, it moves!

https://en.wikipedia.org/wiki/List_of_largest_daily_changes_in_the_S%26P_500_Index

One big jump day can blow your 5% secure yeild out of the water. I encourage all you number crunching market watchers to do as you please but you do others a disservice by acting like that is the only or best way to go. You have to be watching your accounts and the market every single day, and even then you could miss the inflection point.

[grantmeaname]

Stock should have a higher E/Y than the bond's yield because of growth.  The questions are: (a) how much higher is fair, and (b) at what growth rate?

Totally agree, theoretically, but we can't separate 1) real corporate earnings growth, 2) corporate pass through of goods+services inflation, 3) the expansion or shrinking of the premium investors are willing to pay for one unit of growth, which could be volatile and indicative of a dislocation between debt and equity markets. Earnings yield vs corporate bond yield is a poor shorthand for #3 only when it also responds to #1 and #2

[grantmeaname]

I have 2 things to say!

1- I have noticed the trend for market timing making a larger and larger presense on this board over the past year-two. Which is fine! But my worry is that less experienced investors are going to read all these rationalizations for doing so and try to follow along without understanding the implications. The tone of these posts isn't casual "I'm doing this...", but persuasive with the tenet that this is the only logical choice right now. That some people are timing the market and even resist the label of timing the market is kind of a concern!

It is unquestionably objectively true that in the past the forward return of the stock market has been correlated to the P/E or earnings yield on the starting date, and that P/E is generally mean-reverting. It logically follows, and has also been thoroughly demonstrated by Early Retirement Now (the only serious thinker I've seen on what withdrawal rate is actually "safe"), that the safety of an early retirement is highly dependent on equity valuations on retirement day. You can either 1) adjust your plans accordingly or 2) say that the future relationship between market returns and valuations is completely unknowable and you'd rather stay the course regardless. Either course is arguably reasonable, but throwing the derisive label 'market timing' on course #1 helps no one.

[ChpBstrd]

I think you are right, I need a good source of up-to-the-minute P/E's , too many of them are dated.

https://www.yardeni.com/

• Scroll down to "stock market fundamentals & metrics"
• Click to expand
• Note presentations for trailing and forward PE.

Of course, companies only release earnings quarterly, so any of these data will be on average weeks or months old. But Yardeni does a good job of keeping it up to date, probably through some automation. His site is a cornucopia of well-summarized market information.

[tooqk4u22]

I have already made several comments on what I think about markets and direction but to guide somewhat back on topic...earlier I agreed that I felt like we were treading water and now I actually looked at our stuff as of 9/30 and we are basically at the same level as end of 2021 (close to peak) before everything fell apart.   

However, since I went back to work last year I have added roughly 5% in new money to that so basically down 5%ish since peak....considering sp500 and BND are down roughly 10% and 20% over that time, I guess I feel ok about it...of course at the end of this month it will be a little worse.

What was the difference (call it market timing or gut feel or market analysis or whatever) for my results:

1.  2020 - moved bond allocation to short, ultra short and cash making nothing.  Sill lost a bit on the short duration but not near as much.   Was obvious to me that if long term rates were zero they had only one direction to go. Still can't understand why banks could figure this out.   But I get how a regular joe/Jill investor who doesn't have a financial back ground and thus didn't know/understand duration risk would have money in bounds bc they are "Safe".

2.  2020/2021 - Didn't like how top heavy markets were with crazily valued tech so moved have of Sp500/Vti to value to diversify it a bit and it did ok, not so much this year, but hanging on.   

3.  2021 - started going underweight equities more to a conservative AA. 

More recently and looking forward, I am starting to DCF into duration (BND mostly) and equities (split between SP500 a d value) goal is to slowly get back to my target AA and holdings, but haven't quite figured over what time as there is no hurry.

And I totally get that it could have been dumb luck but it was mostly driven by what I was comfortable with and let me sleep at night.   It wasn't emotional and I didn't sell everything, just as I hadn't bought everything when times were good.  It's more if a hedged approach that slides when things seem obviously out of whack.   I don't think we are in that environment right now unless fed doubles rates.

[grantmeaname]

I think you are right, I need a good source of up-to-the-minute P/E's , too many of them are dated.

https://www.yardeni.com/

• Scroll down to "stock market fundamentals & metrics"
• Click to expand
• Note presentations for trailing and forward PE.

Of course, companies only release earnings quarterly, so any of these data will be on average weeks or months old. But Yardeni does a good job of keeping it up to date, probably through some automation. His site is a cornucopia of well-summarized market information.

Amazing, don't know how I've never heard of this before.

[Scandium]

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

I have never liked this argument. Bonds offer nominal returns and corporate profits are effectively inflation-adjusted, so the spread between the two should be stable-ish and the test works intuitively in a period of stable inflation.

So then should we compare corporate earnings growth/PE to the TIPS yield? Which is currently 2.467%. Since they are both inflation adjusted? Per the above calc, that would equate to a "PE" of 40.5

[grantmeaname]

The TIPS yield is inflation adjusted but has no (little) default risk. You could take the TIPS yield plus the corporate bond risk premium (eg 10y BAA yield - 10y T yield) if you cared to. But even then, corporate bonds are lower in the capital structure and safer than corporate equities. I think it's a convenient rule of thumb that you can compare the earnings yield to a bond yield but doesn't stand up to real scrutiny.

[EscapeVelocity2020]

A pretty simple thought exercise for determining if stocks are 'pricey' is comparing the earnings yield (E/P) to their main competitor, a 10 year bond.  If the bond yields 5%, then you need P/E of 20 or lower to be 'competitive'.  There are nuances about earnings that can influence this a bit, but higher bond yields generally means lower equity prices...

I have never liked this argument. Bonds offer nominal returns and corporate profits are effectively inflation-adjusted, so the spread between the two should be stable-ish and the test works intuitively in a period of stable inflation. You could reasonably compare the yield spread in 2012 and 2019, and even compare it to recent history, but the relationship should have broken down when inflation went from a stable 2% to a peaky 9% and then back on its way down to 4% or so. You should be much happier to own an inflation-adjusted 6% yield today than a nominal 5% yield, and the relationship between the two should be different than it was in 2019.

Earnings yield is just a quick mental model to size up the 'expensiveness' of the S&P500, it's by no means a stopping point.  But saying that corporate earnings will meet or exceed inflation is overly simplistic too.  I get the sense that it's taken as gospel here that earnings must match inflation, but there is a whole lot more behind that assumption than just 'increasing prices (inflation) = increasing earnings'.  The cost of earnings is also going up (labor intensive companies), and some companies just cannot raise prices fast enough. 

But bottom line, with equities you are making assumptions around 2024 earnings in order to determine if they are fairly valued vs. a safe return on a US Treasury note.  I feel as if both can easily be argued as being a better value going forward, which leads me to want to hold both assets.

[grantmeaname]

My point wasn't that the premium is the right size today, rather that the relationship between the arguably inflation-indexed equity earnings yield and the nominal corporate bond yield should not be expected to stay constant in two very different inflation regimes.

[vand]

The S&P is down -12.2% from 12/1/2021.  During that time you could have parked your money in something safe and generated at least 8% by now, so fixed income returns (excluding S&P dividends) were 1.08 / 0.878 - 1 = 23% better during this time period.

What are you smoking? The whole melt-off of the market since its peak has been due to the increase in bond yields and concomitant decline in bond prices. There's a certificate of deposit or 2-year bond you could have bought in Dec 2021 that would yield you a safe 8% over 2 years or 4%/year? Savings accounts yielded 0.06% in December 2021, 2-year CDs yielded 0.4%, and a 2-year treasury yielded 0.56%. What about longer-term instruments? If you bought anything other than a CD or a bond that matured, you suffered the repricing of the security lower in the new higher-rate world - VBLTX is down 21% since Dec 2021.

Stocks have had a good overreach but are historically expensive and their unprecedented run with low interest rates as a foundation has been living on borrowed time.  So you can wave your hands and say that in 20 years you'll have generated some sort of acceptable return.  That ignores the fact that you might do much better trimming or avoiding equities altogether in the short term until prices are attractive.

Telling yourself that the you are "buying at a discount" in downturns is a bit silly imo.  Yeah, it's good if you drink the kool aid, but it needs to be slightly more objective than that.

On these pages its take as an article of faith that any downturn in stocks represents a bargain... well, that just ain't so.

Stock aren't at a discount imo. They're pretty fairly price -- they may even be expensive when you consider the less risky returns available elsewhere.  If they were expensive heading into 2022 they are only slightly less expensive today.  They may eventually get to a place where they a bargain, but at current CAPE 31 and P/E 24 you can't say they're cheap and hold a straight face.

Feels like you're 18 months behind, man. The market is quite reasonable after the last 18 months of poor price returns and strong earnings growth. It's no more than one standard deviation above normal on every meaningful valuation metric (and note this is as of September 30th, when the S&P was 120 points higher than it is now, so these valuations have actually declined some more). On Shiller P/E, it's now only one turn above normal, despite reasons to believe that Shiller PE is getting secularly more expensive.


(image is slide 5 from the superb JPM Guide to Markets)

So you're agreeing that it's still expensive? If the largest driver of long (10-15yr) returns is current valuations (which they are) then you must agree that we will are more likely to have below trend growth over this time as all the metrics JPM have highlighted are above their 25yr average? And remember that we are near a 25yr high in interest rates. Risky assets should absolutely be more expensive given the available returns in less risky assets today.

[grantmeaname]

Sure, in the same sense that if you normally buy bananas for $0.29 and they go from $0.59 to $0.30 they're 'still expensive'. The market certainly isn't cheap.

[ChpBstrd]

I'm more concerned about the effects of a decade where businesses chased low-yielding investments with cheap money.

Analyst: "The new opportunity* will have a projected annual ROA of only 5%."
CEO: "But we can borrow from the short-term bond market at 2%. At 5:1 leverage we could earn a 15% ROE for our shareholders!"
A: "Uh, yes, that's correct, but that's a historically low return in a hyper-competitive environment. We'd be at risk if rates rose."
CEO: "Well, rates have been low since 2009. I don't see any reason they'd rise above 5% again by the time my options vest."
A: "Uh, yes, inflation has been lower-than-ideal actually for a decade now, despite a near-zero Federal Funds Rate. There's no impetus for higher rates."
CEO: Let's issue the bonds and take on the project! I have to show the shareholders we're growing and taking advantage of these low rates.

*New branch, facility, factory, efficiency project, bank loan, investment, fleet upgrade, IT project, decision to increase leverage, more employees, etc.

[tooqk4u22]

I'm more concerned about the effects of a decade where businesses chased low-yielding investments with cheap money.

It's true that the last decade was cheap and easy, but the last three years took cheap and easy and shot it up with steroids, Adderall, Crack, energy drinks, and a whole shit ton of other drugs to a level that made the perfect combination of greed, short term thinking, over confidence and delusion.

Analyst: "The new opportunity* will have a projected annual ROA of only 5%."
CEO: "But we can borrow from the short-term bond market at 2%. At 5:1 leverage we could earn a 15% ROE for our shareholders!"
A: "Uh, yes, that's correct, but that's a historically low return in a hyper-competitive environment. We'd be at risk if rates rose."
CEO: "Well, rates have been low since 2009. I don't see any reason they'd rise above 5% again by the time my options vest."
A: "Uh, yes, inflation has been lower-than-ideal actually for a decade now, despite a near-zero Federal Funds Rate. There's no impetus for higher rates."
CEO: Let's issue the bonds and take on the project! I have to show the shareholders we're growing and taking advantage of these low rates.

*New branch, facility, factory, efficiency project, bank loan, investment, fleet upgrade, IT project, decision to increase leverage, more employees, etc.

Yup. At this point the most risky ventures like VC and angel have all but evaporated and the less but still very risky like pre revenue high fliers are on life support. 

The more "Stable" assets like apartments and warehouses, well if they were developed in the last 3-4 years are seeing 20-30% declines and when something was levered 60% just do the math....now those are largely fine operationally but they are very rate sensitive.   

As for the bloat in employees, mega tech led the way with layoffs but more traditional companies are quietly following suit (to many companies hanging on to employees bc it was so hard to get them back in the first place), which will accelerate quickly if earnings become at risk, and that's when the Fed finally gets its way. 

Not too long after that moment will be a great investing environment but it will feel awful and risky.

[vand]

Sure, in the same sense that if you normally buy bananas for $0.29 and they go from $0.59 to $0.30 they're 'still expensive'. The market certainly isn't cheap.

Valuation are important but they are not the the only thing I consider. There is a time factor also required in order to reset sentiment, and we just ain't there yet. People still think the last bull market was "the norm", and ownership of stocks is still nowhere near the sort of levels that we have seen in other bear markets (in fact they are nearer the highs). 

People still overwhelming have this expectation that the stock market has an obligation to make them rich - it has no such thing. The purpose of the stock market, as I have said before, is to enable companies access to capital that they wouldn't be able to raise privately, nothing more. It doesn't care what your personal goals are or your need to retire early. It has been very kind to investors in recent times, but it can and at some point absolutely will massively disappoint a lot of investors such that long belief systems around the market are seriously questioned... That is when the market will really be ready to start new secular bull.

[wantstoinvest]

My brokerage went negative 2.31% now, since jan 2022. Damn!

Hurts to see but I'll keep dumping money in.

[Must_ache]

And remember that we are near a 25yr high in interest rates.

15 years actually according to this graph, but there are a lot of term interest rates (10yr, 30yr) so it probably is true for one of those.

For the thirty years between 1970-2000, the fed interest was rarely BELOW 5%.  All the media likes to portray current interest rates as sky high and stuff is going to break.  I'm glad we are back to a world where bond yields are a resaonable alternative and stock prices aren't inflated like some about-to-pop balloon.