Author Topic: Does easy access to the market drive up prices?  (Read 106319 times)

AJDZee

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Does easy access to the market drive up prices?
« on: January 22, 2023, 04:38:15 PM »
Help me with two ideas I can't seem to get out of my head lately, as I'm feeling more pessimistic about the market in general...

1. Overvalued market?
Over the last 50 years the S&P 500 has returned 9.4% per year (I'm sure all of you know this by heart at this point)
But also in the last 50 years the average p/e of the S&P500 has risen substantially... If you take the 5-year average around 1973 you get a p/e of ~15, but the last 5 years is ~25.
That's a 67% increase in the premium overall market prices are compared to the earnings of the underlying companies. (if you go back to the turn of the 20th century it was 11-15)

How much of that 50-year annualized 9.4% return can be attributed to the overall rise from 15 to 25 p/e? Or does that have a factor at all?
What would be the average market return if we had stayed at ~15 for those 50 years? (somewhere in line to GDP growth?)
Is it sustainable for the next 50 years to return 9%+ annualized on true earnings growth or will the p/e have to keep rising to continue giving that yield?
Is a higher share of our market returns based on speculative continued growth?

2. Is easy access to market contributing to this?

Is there a possibility that in the last 25 years the boom of easy access to the market (and less competition in the way people look to invest) has lead to a torrent of money into the stock market, and overall drives up prices? Is this actually a good thing?
Additionally, index ETFs (on top of another vehicle to easily put money into the market) puts that flood of money indiscriminately into the whole market raising the 'waterline' overall?

This is obviously just taking one index, and looking at a very simple metric p/e, there's many other ways to analyze that would shed more light.

I'm hoping for a healthy, respectful debate! As well I'm hoping to learn... I do not have an economics/business/finance degree, so I have some huge blind spots with this stuff. But I know there's a ton of smart people in this community that can teach me! :)  And believe me this is something I'd love to be wrong about.

https://www.multpl.com/s-p-500-pe-ratio/table/by-year


[apologies if this convo, in one shape or another, has already been on this forum]

MustacheAndaHalf

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Re: Does easy access to the market drive up prices?
« Reply #1 on: January 22, 2023, 08:48:51 PM »
Another measure of P/E is Cyclically Adjusted Price Earnings (CAPE), which takes 10 years of earnings divided by price.  Shiller in the link below refers to Nobel Laurete Robert Schiller:
https://www.multpl.com/shiller-pe

But when you go back 50 or 100 years, there's some problems doing 1:1 comparisons to the present day.  Larry Swedroe covers many of those in his books, and in this article.  There have been changes to make investing safer for investors, and accounting changes that make comparisons to prior times difficult.
https://blog.iese.edu/jestrada/files/2019/04/ETFcom-This-Metric-in-Dire-Need-of-Context.pdf

maizefolk

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Re: Does easy access to the market drive up prices?
« Reply #2 on: January 22, 2023, 09:47:27 PM »
How much of that 50-year annualized 9.4% return can be attributed to the overall rise from 15 to 25 p/e? Or does that have a factor at all?
What would be the average market return if we had stayed at ~15 for those 50 years? (somewhere in line to GDP growth?)

That's easy. If the average P/E ratio was 15 today, the stock market would be worth 60% of what it is today. Over a 50 year time frame that would translate to a decrease in cumulative annual growth rate of almost exactly 1%.

So call it 8.4% instead of 9.4%.

But also keep in mind that a significant proportion of the apparent expansion in P/E ratio is explained by changes in GAAP rules that mean the same corporation with the same circumstances typically will be able to report less earnings today than the exact same corporation could in the 1980s. So even that 1%/year is likely an over estimate of the true effect.

roomtempmayo

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Re: Does easy access to the market drive up prices?
« Reply #3 on: January 23, 2023, 09:26:41 AM »
2. Is easy access to market contributing to this?
Is there a possibility that in the last 25 years the boom of easy access to the market (and less competition in the way people look to invest) has lead to a torrent of money into the stock market, and overall drives up prices? Is this actually a good thing?
Additionally, index ETFs (on top of another vehicle to easily put money into the market) puts that flood of money indiscriminately into the whole market raising the 'waterline' overall?

The short answer is "yes," but it's tough to quantify because there were/are lots of feedback loops involved.

The inflation of the 70s pushed savers to buy stocks to beat inflation.  Schwab, Fidelity, and Vanguard created retail products to enable the average joe to invest in the market, and people did.  If that were simply a net addition to the market, then it would be clear that retail investment instruments inflate stock prices.

However, the existence of credible ways for individuals to invest for their own retirement made the dismantling of defined benefit pensions more palatable for the public, and they were dismantled: in 1980 60.2% of private sector workers had a defined benefit pension, and it feel to 10.4% by 2006.*  So there's been a massive shift in who makes the choices about retirement investments from pension managers to individuals.

While it's probably accurate to say that this shift inflated the stock market, it's also the case that it's depressed the bond market that's heavily populated by institutional investors.

A speculative case could also be made that getting rid of pensions reduced the savings rate across the board, and so depressed asset values broadly.

There are multiple dynamics at work here that have bumped up against one another over time, and so it's not as simple as easy access to the stock market increasing the PE ratio.

I'm curious to see where this conversation goes.  @AJDZee is asking good questions, even if there may not be totally clear answers. 

* See Chart 3: https://www.newamerica.org/economic-growth/policy-papers/facing-an-american-retirement-security-crisis/

AJDZee

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Re: Does easy access to the market drive up prices?
« Reply #4 on: January 23, 2023, 11:50:08 AM »
That Swedroe article was a great read, thanks for sharing!

I hadn't thought about accounting changes, I could see that making a little bit of a difference, yes. And it makes sense when trying to compare over a long period of time... if better regulations have lead to 'safer' investments than a generation ago, I could see why investors would trade a higher P/E for less risk.

The shift from employer DB pensions to a DIY investing is a good call out - acting more like a shift from one source to another, rather than net new money. (and I'm sure individual investors make a small fraction of volume compared to institutional/pensions, etc.)

Without a credible source though I still *feel* like a lot more money is being funneled into the market than ever (accounting for inflation, obviously)
A generation ago there were a lot more avenues that would compete for people's investments... i.e. precious metals, government bonds, real estate, put it into a savings account, etc.
Nowadays a lot more wealth is being concentrated into equities - it seems like everyone and their grandmother are holding on a stock portfolio. We're just on auto-pilot throwing more and more funds because we expect that easy 9.4%.

Is there such a thing has too much money being put into the market?

For the record I'm not making the case that a savings account was a better investment choice than the stock market :) I'm wondering if having wealth distributed to other means, the stock market having more competition for your $, that is a necessary check & balance to a healthy equilibrium.

clifp

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Re: Does easy access to the market drive up prices?
« Reply #5 on: January 23, 2023, 02:29:43 PM »
That Swedroe article was a great read, thanks for sharing!

I hadn't thought about accounting changes, I could see that making a little bit of a difference, yes. And it makes sense when trying to compare over a long period of time... if better regulations have lead to 'safer' investments than a generation ago, I could see why investors would trade a higher P/E for less risk.

The shift from employer DB pensions to a DIY investing is a good call out - acting more like a shift from one source to another, rather than net new money. (and I'm sure individual investors make a small fraction of volume compared to institutional/pensions, etc.)

Without a credible source though I still *feel* like a lot more money is being funneled into the market than ever (accounting for inflation, obviously)
A generation ago there were a lot more avenues that would compete for people's investments... i.e. precious metals, government bonds, real estate, put it into a savings account, etc.
Nowadays a lot more wealth is being concentrated into equities - it seems like everyone and their grandmother are holding on a stock portfolio. We're just on auto-pilot throwing more and more funds because we expect that easy 9.4%.

Is there such a thing has too much money being put into the market?

For the record I'm not making the case that a savings account was a better investment choice than the stock market :) I'm wondering if having wealth distributed to other means, the stock market having more competition for your $, that is a necessary check & balance to a healthy equilibrium.


The Swedroe article was quite good. 

I'm sure you are correct the democratization of the stock market is a significant factor in its price.  It is much easier, and probably more importantly much less expensive to own stocks this century, compared to the 20th century.   As a first approximation, only rich people, and institutions own stocks in the 20th century.  Middle class folks used saving accounts to save money, upper middle class bought real estate. In large part, stocks are a much better product, than they were even 20 years ago, much less 50 years ago. In the same way computers, cellphones, and robot vacuum cleaners are.  I'll explain why.

I was Jr in High School when bought my first financial product in 1975, Chrysler bonds.  I bet I paid more than $100 in commission, to the Merrill Lynch broker for a couple of thousand worth of bonds.  I was the second person in my family to use a brokerage.  I  had no idea that that company was teetering on bankruptcy, I just knew that bonds were paying nearly 15% and I need the money for college in a few years.  1975 was also the year the SEC deregulated broker commissions and Charles Schwab started his company.  Before then buying 100 shares (and there were penalties if you didn't buy in lots of 100 shares) at say $25 would cost you $100.  Schwab and his competitors drove the price down from $100 to $20 by the end of the century.   But there was still the bid-ask spread. Stocks were trading in fractions until 2000.  A typical spread was $24 3/4 bid and $25 ask, plus that $100 commission and you were losing 5% on every stock transaction, making it pretty much impossible to make money trading stocks. Buying and selling stocks was easier than buying a house, but nearly as expensive. Even when commissions got down to $20 for up to 1,000 share the bid/ask spread remained at 1/8 and often 1/4, not a huge expense for buy and hold investor, but significant to someone like myself who'd buy and sell stocks 2-3/month, and huge for a day trader.

What about mutual funds? Even Vanguard, the originator of index funds, still had a lot more actively managed funds than index funds until the last decade.  ETF started in 1993 but didn't really become popular until the mid-2000s.  Even today Index funds are only 20-30% of the market.  A huge amount of money invested in the stock market is via financial advisors who put their client in actively managed funds, with high expenses and still charge 4-8% commissions.

Finally, lets talk about how people got information about stocks and/or mutual funds.  Obviously, Google and Yahoo finance didn't exist until well after the companies were founded.   Pretty internet days, retail investor would mostly watch a TV show called Wall Street Week with Louis Rukeyser, or for the hard folks, subscribe to Value line which would send you huge book filled with information on various stocks.  It was no where near as complete or up to date, as practically in stock information stie on the web.

So to summarize, stocks are much easier and cheaper to buy/sell and own than they were in the past. It is very easy to get diversification, and almost as easy to get information about stocks and mutual funds.  So it is no wonder, that stocks are far more popular than they were in the past.  Still barely 1/2 of American households own stocks so there is room for them to get more popular.

wageslave23

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Re: Does easy access to the market drive up prices?
« Reply #6 on: January 23, 2023, 02:29:52 PM »
I've never seen anyone who thinks we will get 9% returns over the next 50 years. For all the reasons mentioned above, plus dozens more. Foreign investment into the sp500 and the value of the dollar are another big factor.  9% might have happened in the past, but it's not very useful in predicting the future.  My guess is 2% inflation and 4% real returns for a total of 6% a year over the next 15 yrs. Buts that's a complete crapshoot and beyond that is even more futile to try to predict.

AJDZee

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Re: Does easy access to the market drive up prices?
« Reply #7 on: January 23, 2023, 04:29:30 PM »
I've never seen anyone who thinks we will get 9% returns over the next 50 years. For all the reasons mentioned above, plus dozens more. Foreign investment into the sp500 and the value of the dollar are another big factor.  9% might have happened in the past, but it's not very useful in predicting the future.  My guess is 2% inflation and 4% real returns for a total of 6% a year over the next 15 yrs. Buts that's a complete crapshoot and beyond that is even more futile to try to predict.

Oh really? Im under the impression most here are expecting at least 9% annualized. Based on historical market return. If we opened up everyone's harddrives I'm sure most would have that spreadsheet we all know and love, with a 9% CAGR ;)

wageslave23

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Re: Does easy access to the market drive up prices?
« Reply #8 on: January 23, 2023, 06:02:15 PM »
I've never seen anyone who thinks we will get 9% returns over the next 50 years. For all the reasons mentioned above, plus dozens more. Foreign investment into the sp500 and the value of the dollar are another big factor.  9% might have happened in the past, but it's not very useful in predicting the future.  My guess is 2% inflation and 4% real returns for a total of 6% a year over the next 15 yrs. Buts that's a complete crapshoot and beyond that is even more futile to try to predict.

Oh really? Im under the impression most here are expecting at least 9% annualized. Based on historical market return. If we opened up everyone's harddrives I'm sure most would have that spreadsheet we all know and love, with a 9% CAGR ;)

There was another thread asking about predicting future market returns and most of the responses were 5-7%.

AJDZee

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Re: Does easy access to the market drive up prices?
« Reply #9 on: January 23, 2023, 07:49:51 PM »
I've never seen anyone who thinks we will get 9% returns over the next 50 years. For all the reasons mentioned above, plus dozens more. Foreign investment into the sp500 and the value of the dollar are another big factor.  9% might have happened in the past, but it's not very useful in predicting the future.  My guess is 2% inflation and 4% real returns for a total of 6% a year over the next 15 yrs. Buts that's a complete crapshoot and beyond that is even more futile to try to predict.

Oh really? Im under the impression most here are expecting at least 9% annualized. Based on historical market return. If we opened up everyone's harddrives I'm sure most would have that spreadsheet we all know and love, with a 9% CAGR ;)

There was another thread asking about predicting future market returns and most of the responses were 5-7%.

Oh that's interesting, I didn't know that. Is that excluding inflation?

MustacheAndaHalf

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Re: Does easy access to the market drive up prices?
« Reply #10 on: January 23, 2023, 09:01:29 PM »
That Swedroe article was a great read, thanks for sharing!
You're welcome!  That article captuires one of the key ideas I took from reading many of Larry Swedroe's books, where he focuses not just on returns but also reduced volatility.
https://www.amazon.com/Guide-Winning-Investment-Strategy-Youll/dp/0312339879

Without a credible source though I still *feel* like a lot more money is being funneled into the market than ever (accounting for inflation, obviously)
A generation ago there were a lot more avenues that would compete for people's investments... i.e. precious metals, government bonds, real estate, put it into a savings account, etc.
...
Is there such a thing has too much money being put into the market?
I wonder if this feeling is related to the Fed?  Back in the global financial crisis, the Fed printed money and handed it to large banks ("quantitative easing").  At the time, the banks just kept the money, as they feared running out.  Over time, I imagine that $3 trillion USD has leaked into the economy.  The Fed injected another trillion halfway through the past decade, and then $4 trillion more during Covid.  All told that was just under $9 trillion USD injected into the U.S. economy, with some fraction winding up in the stock market.

The rise of big tech could be another source of trillions in the stock market.  Back before the 2008 crisis, Apple's market cap was less than 2% of it's current $2.2 trillion.  The other big tech companies have contributed similar trillions, at least until 2022.  But if your feelings were anchored in 2021, that's another source of trillions in the stock market.
« Last Edit: January 24, 2023, 01:57:55 AM by MustacheAndaHalf »

RWD

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Re: Does easy access to the market drive up prices?
« Reply #11 on: January 23, 2023, 09:21:26 PM »
Help me with two ideas I can't seem to get out of my head lately, as I'm feeling more pessimistic about the market in general...

Your question about P/E ratios specifically seems to have already been answered. But to add on a little bit, if P/E ratios were everything then everyone would just be investing in emerging markets.

Also, I suppose I'm contractually obligated to bring out the list (at least a few of these links talk about P/E ratios):
Spoiler: show

1/2013  [SP500 = 1462]
https://forum.mrmoneymustache.com/investor-alley/is-now-a-bad-time-to-invest-in-stock-index-funds/
5/2013  [1583]
https://forum.mrmoneymustache.com/investor-alley/starting-today!/
https://forum.mrmoneymustache.com/investor-alley/$80k-sitting-in-cash-bc-scared-of-high-flying-stock-mkt-punch-me/
10/2013  [1695]
https://forum.mrmoneymustache.com/investor-alley/stock-market-expensive-now-alternatives/
5/2014  [1884]
https://forum.mrmoneymustache.com/investor-alley/stock-market-is-high-am-i-too-late/
https://forum.mrmoneymustache.com/investor-alley/is-the-stock-market-too-expensive-to-get-back-in/
7/2014  [1973]
https://forum.mrmoneymustache.com/investor-alley/current-market-has-me-scared-to-invest/
9/2014  [2002]
https://forum.mrmoneymustache.com/investor-alley/is-it-a-good-time-to-invest-new-money/
10/2014  [1946]
https://forum.mrmoneymustache.com/ask-a-mustachian/stock-market-would-you-buy-now-or-wait/
1/2015  [2058]
https://forum.mrmoneymustache.com/investor-alley/stock-market-should-i-be-concerned/
3/2015  [2117]
https://forum.mrmoneymustache.com/investor-alley/talk-me-out-of-timing-the-australian-market/
12/2015  [2103]
https://forum.mrmoneymustache.com/ask-a-mustachian/where-to-put-a-large-windfall-with-stock-market-near-all-time-highs/
1/2016  [2013]
https://forum.mrmoneymustache.com/investor-alley/about-to-sell-everything-talk-me-off-the-ledge-(or-push-me-off)-please!/
4/2016 [2073]
https://forum.mrmoneymustache.com/investor-alley/here-it-comes-red-dow/
2/2017  [2280]
https://forum.mrmoneymustache.com/investor-alley/does-anyone-think-we-are-in-a-bubble/
4/2017  [2359]
https://forum.mrmoneymustache.com/investor-alley/top-is-in/
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https://forum.mrmoneymustache.com/continue-the-blog-conversation/recession-coming/
8/2017  [2476]
https://forum.mrmoneymustache.com/investor-alley/getting-scared-of-stock-market/
1/2018  [2696]
https://forum.mrmoneymustache.com/investor-alley/nervous-about-the-market/
3/2018  [2678]
https://forum.mrmoneymustache.com/investor-alley/when-would-you-get-back-in/
5/2018  [2655]
https://forum.mrmoneymustache.com/investor-alley/investing-in-a-bull-market/
6/2018  [2735]
https://forum.mrmoneymustache.com/investor-alley/moving-to-cash-market-timing-can%27t-believe-it/
10/2018  [2925]
https://forum.mrmoneymustache.com/welcome-to-the-forum/sell-index-funds-now-for-down-payment-during-recession/
2/2019  [2707]
https://forum.mrmoneymustache.com/investor-alley/welp-i'm-going-to-take-a-stab-at-timing-the-market/
4/2019  [2867]
https://forum.mrmoneymustache.com/investor-alley/buy-vtsax-now-while-its-this-high-or-wait-till-a-drop/
https://forum.mrmoneymustache.com/investor-alley/how-concerned-are-you-about-the-everything-bubble/
5/2019  [2924]
https://forum.mrmoneymustache.com/ask-a-mustachian/scared-of-investing-in-the-stock-market-now/
6/2019  [2890]
https://forum.mrmoneymustache.com/uk-tax-discussion/global-index-tracker-is-so-high!-do-i-just-keep-putting-my-money-into-it-anyway/
7/2019 [3026]
https://forum.mrmoneymustache.com/investor-alley/would-you-106836/
8/2019 [2889]
https://forum.mrmoneymustache.com/investor-alley/vtsax-and-a-looming-recession/
9/2019 [2978]
https://forum.mrmoneymustache.com/investor-alley/recession-in-2-ish-years-scale-and-nature/
10/2019 [2986]
https://forum.mrmoneymustache.com/investor-alley/advice-needed-108726/
11/2019 [3110]
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12/2019 [3169]
https://forum.mrmoneymustache.com/ask-a-mustachian/help!-i-dont-know-where-to-start/
https://forum.mrmoneymustache.com/investor-alley/the-old-excuses-for-down-swings-and-a-reality-yet-we-are-at-all-time-highs!/
1/2020 [3296]
https://forum.mrmoneymustache.com/investor-alley/what-to-do-with-a-large-sum-of-money-bad-time-to-buy-index-funds/
2/2020 [3345]
https://forum.mrmoneymustache.com/real-estate-and-landlording/in-a-pickle/
6/2020 [3125]
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https://forum.mrmoneymustache.com/investor-alley/anyone-else-struggling-to-not-sell/
8/2020 [3360]
https://forum.mrmoneymustache.com/investor-alley/invest-lump-sum-or-wait/
11/2020 [3585]
https://forum.mrmoneymustache.com/investor-alley/little-reminder-just-how-gross-the-valuation-of-equities-is/
https://forum.mrmoneymustache.com/investor-alley/anyone-else-terrified-of-stock-market-right-now/
12/2020 [3703]
https://forum.mrmoneymustache.com/welcome-to-the-forum/i-pulled-my-index-funds-because-fear-of-market-crash/
2/2021 [3935]
https://forum.mrmoneymustache.com/investor-alley/beginner-question-is-it-a-good-time-to-invest-in-stock-etf-now/
3/2021 [3939]
https://forum.mrmoneymustache.com/investor-alley/sky-high-sp-500-pe-ratio/
4/2021 [4129]
https://forum.mrmoneymustache.com/investor-alley/bad-time-to-enter-large-position-into-market/
https://forum.mrmoneymustache.com/investor-alley/advice-121943/
6/2021 [4281]
https://forum.mrmoneymustache.com/ask-a-mustachian/what-to-do-with-a-windfall-122870/
8/2021 [4437]
https://forum.mrmoneymustache.com/investor-alley/the-great-marital-dispute-who-is-'right'-about-how-to-invest!/
9/2021 [4535]
https://forum.mrmoneymustache.com/investor-alley/thoughtshelp-took-crypto-profits-cash-heavy/
https://forum.mrmoneymustache.com/investor-alley/what-to-do-with-large-bonus-123900/
11/2021 [4595]
https://forum.mrmoneymustache.com/ask-a-mustachian/what-to-do-with-an-inheritance-(international)/
12/2021 [4701]
https://forum.mrmoneymustache.com/investor-alley/is-a-7-return-unlikely-without-a-complex-approach/
https://forum.mrmoneymustache.com/welcome-to-the-forum/upcoming-recession/
3/2022 [4201]
https://forum.mrmoneymustache.com/welcome-to-the-forum/what-to-do-with-$100k-126670/
5/2022 [3991]
https://forum.mrmoneymustache.com/investor-alley/where-to-stuff-this-extra-income/
6/2022 [4177]
https://forum.mrmoneymustache.com/investor-alley/safer-investment-ideas-for-8-years/
11/2022 [3945]
https://forum.mrmoneymustache.com/ask-a-mustachian/live-off-the-cash-or-invest-it-already-fire'd/
1/2023 [4020]
https://forum.mrmoneymustache.com/investor-alley/does-easy-access-to-the-market-drive-up-prices/

Miscellaneous
https://forum.mrmoneymustache.com/investor-alley/%27but-right-now-the-market-is-at-an-all-time-high-%27/
https://forum.mrmoneymustache.com/investor-alley/the-great-market-crash-of-2016!/
https://forum.mrmoneymustache.com/investor-alley/how-to-deal-with-losing-$117k-in-stock-market/
https://forum.mrmoneymustache.com/investor-alley/so-we're-basically-on-track-for-a-bear-market-by-tomorrow/
https://forum.mrmoneymustache.com/investor-alley/anyone-else-feeling-depressed-about-global-equities-10-year-outlook/
https://forum.mrmoneymustache.com/investor-alley/stocks-will-only-return-4-annually-for-next-decade-john-bogle/
https://forum.mrmoneymustache.com/welcome-to-the-forum/new-saver-worried-about-future-stockmarket/
https://forum.mrmoneymustache.com/investor-alley/i-tried-to-time-the-market-roast-me-and-tell-me-what-to-do-now/
https://forum.mrmoneymustache.com/investor-alley/help-i-screwed-up/
https://forum.mrmoneymustache.com/ask-a-mustachian/lost-all-my-money-in-the-stock-market-made-it-all-back-and-some-need-advice/
https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/lessons-from-riding-the-hot-stock-train/

ChpBstrd

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Re: Does easy access to the market drive up prices?
« Reply #12 on: January 23, 2023, 09:50:57 PM »
Is it sustainable for the next 50 years to return 9%+ annualized on true earnings growth or will the p/e have to keep rising to continue giving that yield?

No one dares try to answer this question, because none of us have crystal balls. I'll offer a weaselly answer and say "it's possible".

Here's how it could happen:
  • Biotech companies use AI and gene editing to develop cancer vaccines and anti-aging treatments. People are highly motivated to work very hard to pay the very high prices for these treatments, and they are productive for longer anyway, and so the economy squeezes more work out of the same number of workers.
  • Space tourism becomes accessible to the middle class, with orbital trips costing a few thousand bucks in today's money. A trillion dollar industry evolves.
  • AI reallocates capital from workers to corporations as it consumes jobs. Investors go into a frenzy trying to buy equity in AI on the rationale that labor will soon be worthless, and so the only way to earn money in the future will be to own these productive assets. The world's capital is allocated to a tech bubble exponentially larger than the dot-com bubble. PE's of 50 become the norm, as most investors use option strategies rather than dividends or interest to generate income.
  • Climate change leads to worldwide mass migration and the concentration of people into megaslums containing hundreds of millions of people each. The close proximity leads to awful living conditions, but creates a massive economic dynamo. People's proximity creates opportunities for them to learn and work together. Businesses arise faster in these slums than they could have in their old home countries. Families that used to earn $3/day start earning $10/day. Suddenly the slums become desirable emerging markets.
  • A global decline in organized religion creates a surplus of time, money, charity, and creativity, a fraction of which is applied in economically productive ways. The decline in religious conflict and oppression leads to conditions conducive to economic development, advanced education, and women's empowerment worldwide. Places like Iraq, El Salvador, Pakistan, and the Balkans start to resemble today's secular economic powers like Denmark, Norway, France, and Germany. In the U.S, places like Mississippi or Alabama start to resemble places like Vermont or Massachusetts in terms of public health, educational attainment, income, crime, and innovation.
  • The US, EU, and Japan, facing demographic decline, are forced to open up their migration policies and compete for the best workers. Tens of millions of people migrate to each country and set to work starting businesses and solving problems.
  • India's economy grows to eclipse both China and the US combined.
  • Working From Home becomes a normal expectation for knowledge workers or anyone using a computer to work. Consumers and their societies save massive fortunes by not driving hundreds of millions of cars around, dying at a rate of tens of thousands per year, and this surplus is plowed into forms of consumption that require more workers than the old car and petroleum industries.
  • AI increases business productivity as it matures, chopping costs 2-3% each year for the next five decades. Surpluses of food, goods, and AI-provided services lead to a consumption boom, and feeds an upward spiral of profits and lifestyle upgrades for the next 50 years.
If this all sounds a little too sci-fi, imagine explaining the computer revolution, companies like Google, and the general rise in prosperity to someone from 1973. Your talk would be unimaginable.

clifp

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Re: Does easy access to the market drive up prices?
« Reply #13 on: January 24, 2023, 01:16:11 AM »
I've never seen anyone who thinks we will get 9% returns over the next 50 years. For all the reasons mentioned above, plus dozens more. Foreign investment into the sp500 and the value of the dollar are another big factor.  9% might have happened in the past, but it's not very useful in predicting the future.  My guess is 2% inflation and 4% real returns for a total of 6% a year over the next 15 yrs. Buts that's a complete crapshoot and beyond that is even more futile to try to predict.

Oh really? Im under the impression most here are expecting at least 9% annualized. Based on historical market return. If we opened up everyone's harddrives I'm sure most would have that spreadsheet we all know and love, with a 9% CAGR ;)

9.5% is what I use.  Although a couple of cavets are worth noting, that is nominal not real and I predict inflation is probably 4-5% for possibly for a long time. I think the next decade will see lower returns because of the crazy returns in the last bull market also. I think is possible but not really likely that stock market returns will be worldwide averages and not just US.

AJDZee

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Re: Does easy access to the market drive up prices?
« Reply #14 on: January 24, 2023, 09:17:32 AM »
Help me with two ideas I can't seem to get out of my head lately, as I'm feeling more pessimistic about the market in general...

Also, I suppose I'm contractually obligated to bring out the list (at least a few of these links talk about P/E ratios):


LOL! I guess I've earned my place being added to the cacophony of others who have long asked the same about over-valued markets.
I would argue my 2nd point has a separate nuance to others, but definitely my 1st is an echo of those earlier threads, I'll own that.

AJDZee

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Re: Does easy access to the market drive up prices?
« Reply #15 on: January 24, 2023, 09:30:18 AM »
Is it sustainable for the next 50 years to return 9%+ annualized on true earnings growth or will the p/e have to keep rising to continue giving that yield?

No one dares try to answer this question, because none of us have crystal balls. I'll offer a weaselly answer and say "it's possible".

Here's how it could happen:

I like this choose your own adventure! very comprehensive, thank you.
While we're throwing out various future scenarios, any predictions on the effects that China's population will have on global markets?
Depending who you ask some say their population has peaked and will rapidly decrease over next few decades. India will over take them as the worlds most populous country in April
« Last Edit: January 24, 2023, 09:32:10 AM by AJDZee »

wageslave23

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Re: Does easy access to the market drive up prices?
« Reply #16 on: January 24, 2023, 01:28:52 PM »
I've never seen anyone who thinks we will get 9% returns over the next 50 years. For all the reasons mentioned above, plus dozens more. Foreign investment into the sp500 and the value of the dollar are another big factor.  9% might have happened in the past, but it's not very useful in predicting the future.  My guess is 2% inflation and 4% real returns for a total of 6% a year over the next 15 yrs. Buts that's a complete crapshoot and beyond that is even more futile to try to predict.

Oh really? Im under the impression most here are expecting at least 9% annualized. Based on historical market return. If we opened up everyone's harddrives I'm sure most would have that spreadsheet we all know and love, with a 9% CAGR ;)

There was another thread asking about predicting future market returns and most of the responses were 5-7%.

Oh that's interesting, I didn't know that. Is that excluding inflation?

Yes, that was including inflation. 

wageslave23

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Re: Does easy access to the market drive up prices?
« Reply #17 on: January 24, 2023, 01:32:35 PM »
OP, I think you would really like the early retirement now   blog. He analyzes pe ratios and what that means for future returns.

vand

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Re: Does easy access to the market drive up prices?
« Reply #18 on: January 26, 2023, 03:00:51 AM »
Yes, it probably does a bit, but imo there are other bigger factors:

- Increasing real incomes, means people can afford to invest more, and that wealth has to go somewhere, so it drives up asset prices
- Secular fall (until recently) in interest rates
- Increasing life expectancy, especially for those who are wealthiest and have the most money to invest, means they have a longer time to compound their wealth and are willing to accept slight lower expected rate of return
« Last Edit: January 26, 2023, 03:02:23 AM by vand »

vand

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Re: Does easy access to the market drive up prices?
« Reply #19 on: January 29, 2023, 04:52:39 AM »
They tackled this q in the latest episode of portfolio rescue:

Briefly

- probably gross return will be lower
- but net returns can be similar, as in the past capturing returns was expensive and riskier

This really can't be emphasized enough. When people quote the dow averaging 10pc for a century it may have cost you 3% to capture those returns.

- Even the first Vanguard tracker had an 8% front load fee(!)



« Last Edit: January 29, 2023, 04:55:19 AM by vand »