Author Topic: ‘Gut Feelings’ Are Driving the Markets  (Read 2527 times)

AdrianC

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‘Gut Feelings’ Are Driving the Markets
« on: January 06, 2020, 03:14:23 AM »
Interesting piece by Robert Shiller:

https://www.nytimes.com/2020/01/02/business/gut-feelings-are-driving-the-markets.html

CAPE is high (31), but why?

That brings us to another factor, which John Maynard Keynes called “animal spirits.” It is a sense of optimism and ready energy to be entrepreneurial and take risks, and it has been adjudged to contribute to high stock market levels. Animal spirits are not adequately measured by business consumer confidence indexes, because the surveyors do not probe for such deep feelings.

High animal spirits in the stock market are often associated with the disparagement of traditional authority and expert opinion. This popular narrative often advocates relying on your “gut feelings” to try what experts say is doomed to failure.

ChpBstrd

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #1 on: January 08, 2020, 05:17:00 PM »
It’s actually an interesting commentary on how intuitive thinking has become more culturally popular than analytical thinking, or trust for science and expertise. “Gut” level reasoning extends from cultural icons like Jack Welch (whose company declined after his tenure) to Steve Jobs (whose gut instincts led him to treat cancer with “alternative medicine” instead of medicine) to Trump.

Extending the observation to the stock market, Shiller applies this cultural theme to explain why the “animal spirits” have persuaded us all not to flee from stocks at CAPEs > 30, despite such a setup never turning out well in the end. Shiller implies that it’s not so much that the market can stay irrational longer than we can remain solvent, it’s a question of how long bearish investors can stay committed to their analytical methods when valuations keep going higher and higher around them.

2sk22

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #2 on: January 09, 2020, 05:56:20 AM »
More from today's NY times:

https://www.nytimes.com/2020/01/08/business/economy-recession-economists.html

Quote
Underlying their sense of foreboding was a widespread sentiment that the current expansion is built on a potentially shaky combination of high deficits and low interest rates — and when it ends, as it is bound to do eventually, it could do so painfully.

Ockhamist

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #3 on: January 09, 2020, 06:39:19 AM »
The thing is “it’s different this time.”

Dangerous words but there is some truth to them.

Interest rates are not just low, they are at entire history of human civilization lows. 

Meanwhile government deficits are at screw it we can just print money highs.

The fact that we are in uncharted waters is evidenced by the fact that despite these two factors we have negligible inflation.

In the long run this cannot end well for markets unless there is some sort of fundamental economic change underway (not impossible).   But even if this is just another moment of temporary market insanity, it can go on for a while.  Anyone who accurately turns out to predict how long “a while” will turn out to be is just a lucky guesser.

Scandium

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #4 on: January 09, 2020, 06:50:58 AM »


disparagement of traditional authority and expert opinion.
Sure gut feeling is dumb, but to be fair the so-called "experts" have proven many time over that they don't know anything and are totally wrong pretty much all the time! When will we admit that market analyst is a absolutely vacuous title with no qualifications that shouldn't be taken seriously by anyone? On the same level as palm reader and free-energy sales people.

ender

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #5 on: January 09, 2020, 06:54:26 AM »
In the long run this cannot end well for markets unless there is some sort of fundamental economic change underway (not impossible).   But even if this is just another moment of temporary market insanity, it can go on for a while.  Anyone who accurately turns out to predict how long “a while” will turn out to be is just a lucky guesser.

Yep.

These types of claims have happened for what, 5+ years now?

Eventually one prediction will turn out right. But it's consistently been announced that the next recession is near, that the market is a bubble, etc. For years.

ChpBstrd

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #6 on: January 09, 2020, 07:19:35 AM »


disparagement of traditional authority and expert opinion.
Sure gut feeling is dumb, but to be fair the so-called "experts" have proven many time over that they don't know anything and are totally wrong pretty much all the time! When will we admit that market analyst is a absolutely vacuous title with no qualifications that shouldn't be taken seriously by anyone? On the same level as palm reader and free-energy sales people.

It’s true that “financial planners”, active managers, and most economists who dare make price predictions have been flat out wrong for at least decade.

Move outside the realm of money though, and this preference for intuitive thinking has impacted fields like medicine, engineering, and IT, where the experts using empirical methods are making great strides and yet the public distrusts them.

My conclusion is that a distrust of expertise and evidence is a cultural theme that isn’t based on the performance of those methods. It’s based on something else - maybe declining social cohesion or the easy fabrication of information on the internet.

Buffaloski Boris

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #7 on: January 09, 2020, 09:24:22 AM »
Greater fool theory?

Good article and as I’ve detailed (too) many times on the MMM forums, CAPE and PE ratios are extremely high and will probably revert at least closer to the mean. But who knows when, or if they reversion will be back to the mean or maybe a higher new normal?

For far too long I got wrapped up around the issue of high CAPE and PE ratio’s. Then I finally realized that the world does not end at the US border. There are all sorts of markets outside the United States with valuations that look a little more rational to me.  So, I focus on those instead.

js82

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #8 on: January 09, 2020, 06:23:35 PM »
Greater fool theory?

Good article and as I’ve detailed (too) many times on the MMM forums, CAPE and PE ratios are extremely high and will probably revert at least closer to the mean. But who knows when, or if they reversion will be back to the mean or maybe a higher new normal?

For far too long I got wrapped up around the issue of high CAPE and PE ratio’s. Then I finally realized that the world does not end at the US border. There are all sorts of markets outside the United States with valuations that look a little more rational to me.  So, I focus on those instead.

I think CAPE in the US is slightly skewed, so things are not *quite* as bad as it would suggest.

The corporate tax cut is only factored in for 2 of the past 10 years.  When you make a substantial cut to corporate taxes, stock price inflation immediately follows, because you've boosted corporate profits.  Reducing corporate tax rates from 35 to 21 percent(such that corporations now keep 79% instead of 65% of earnings) is substantial in terms of its impact on stock valuations.  That's not to say stocks are cheap - they're not - but they're not quite as expensive as the traditional CAPE metric would suggest.

vand

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #9 on: January 10, 2020, 03:01:36 AM »

For far too long I got wrapped up around the issue of high CAPE and PE ratio’s. Then I finally realized that the world does not end at the US border. There are all sorts of markets outside the United States with valuations that look a little more rational to me.  So, I focus on those instead.

yeah,  me too. I have about 43% total equity exposure but only about 3-4% general US equity exposure. The bulk of my equity exposure is split between UK dividend stocks, emerging market, asian markets, and commodity/resource funds.

I think that US stocks are very expensive. But, equally, there is no reason why valuations must revert to old multiples. Stocks will trade at prices which people are willing to pay for them. As I hypothesized in the other thread, if indexing is the preferred means of stock exposure now, that means the risk profile of equities as an asset class has changed, and if that is so then they may warrant trading on permanently higher earnings multiples. You don't have to worry about going broke holding an index tracker, but if you held each of the original Dow30 stocks, well, none of them would still be big enough to be in the Dow30 today.



« Last Edit: January 10, 2020, 03:09:17 AM by vand »

Maenad

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #10 on: January 10, 2020, 05:34:29 AM »
With all due respect to Shiller, who is brilliant, and I have say, "Yeah, and? How is this different from the rest of history?". Honestly, just pick up a copy of a Random Walk Down Wall Street and read the historical part - it talks about the various bubbles of the 20th century, and in each one of those you see the same patterns crop up again and again.

We are not rational. We have not yet evolved to be more so. You can ride the waves or try to find a way to harness them, but you can't stop them.

ender

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #11 on: January 10, 2020, 06:19:55 AM »
Greater fool theory?

Good article and as I’ve detailed (too) many times on the MMM forums, CAPE and PE ratios are extremely high and will probably revert at least closer to the mean. But who knows when, or if they reversion will be back to the mean or maybe a higher new normal?

For far too long I got wrapped up around the issue of high CAPE and PE ratio’s. Then I finally realized that the world does not end at the US border. There are all sorts of markets outside the United States with valuations that look a little more rational to me.  So, I focus on those instead.

I think CAPE in the US is slightly skewed, so things are not *quite* as bad as it would suggest.

The corporate tax cut is only factored in for 2 of the past 10 years.  When you make a substantial cut to corporate taxes, stock price inflation immediately follows, because you've boosted corporate profits.  Reducing corporate tax rates from 35 to 21 percent(such that corporations now keep 79% instead of 65% of earnings) is substantial in terms of its impact on stock valuations.  That's not to say stocks are cheap - they're not - but they're not quite as expensive as the traditional CAPE metric would suggest.

I've also wondered how stock buybacks affect valuation.

My understanding is that in the past decade, stock buybacks have skyrocketed compared to before.

Are there good resources about this? Or how changes in reporting affect actually

AdrianC

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #12 on: January 10, 2020, 06:35:34 AM »
I think CAPE in the US is slightly skewed, so things are not *quite* as bad as it would suggest.

The corporate tax cut is only factored in for 2 of the past 10 years.  When you make a substantial cut to corporate taxes, stock price inflation immediately follows, because you've boosted corporate profits.  Reducing corporate tax rates from 35 to 21 percent(such that corporations now keep 79% instead of 65% of earnings) is substantial in terms of its impact on stock valuations.  That's not to say stocks are cheap - they're not - but they're not quite as expensive as the traditional CAPE metric would suggest.

Does CAPE over 2 years tell us anything?

CAPE calculator:
https://dqydj.com/shiller-pe-cape-ratio-calculator/

Current (10 Year) 33.992 Median 16.242
Current (2 Year) 39.639 Median 14.934


theolympians

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #13 on: January 10, 2020, 09:10:21 AM »


disparagement of traditional authority and expert opinion.
Sure gut feeling is dumb, but to be fair the so-called "experts" have proven many time over that they don't know anything and are totally wrong pretty much all the time! When will we admit that market analyst is a absolutely vacuous title with no qualifications that shouldn't be taken seriously by anyone? On the same level as palm reader and free-energy sales people.

+1

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #14 on: January 10, 2020, 09:59:08 AM »


My conclusion is that a distrust of expertise and evidence is a cultural theme that isn’t based on the performance of those methods. It’s based on something else - maybe declining social cohesion or the easy fabrication of information on the internet.

If  humanity's average IQ is  declining,  I don't think as of 2020 the decline's magnitude is all that significant in terms of the number itself.

This is not to say that  declining average IQ  doesn't factor into  "something else."


www.nbcnews› think › opinion › iq-rates-are-dropping-many...
May 22, 2019 - In a host of leading nations, IQ scores have started to decline. ... evidence of social progress, palpable proof that humanity was getting steadily ...


Are IQ scores going down? What researchers say about ...
slate.com › 2018/09 › iq-scores-going-down-research-flynn-effect
Sep 19, 2018 - IQ scores look to be on the decline. ... We're just as drawn to other signs and symptoms of human degeneration, as expressed in trendlines ...



IQ scores are falling and have been for decades
.cnn. 2018/06/13 › health › falling-iq-scores-study-intl
Jun 14, 2018 - IQ scores have been steadily falling for the past few decades, with ... driving the decline in IQ scores, according to the study, published Monday.

bacchi

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #15 on: January 10, 2020, 11:17:35 AM »


My conclusion is that a distrust of expertise and evidence is a cultural theme that isn’t based on the performance of those methods. It’s based on something else - maybe declining social cohesion or the easy fabrication of information on the internet.

If  humanity's average IQ is  declining,  I don't think as of 2020 the decline's magnitude is all that significant in terms of the number itself.

This is not to say that  declining average IQ  doesn't factor into  "something else."

Without reading the links, I assume this is semantics because how can IQ "decline?" A 100 IQ is the center of a bell curve.

celerystalks

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #16 on: January 15, 2020, 08:03:51 PM »
Companies have returned a lot of capital via share buybacks as opposed to dividends. This bids up the price of the remaining shares in the process of returning the cash.  I think we start to worry when the trend reverses and companies start offering subsequent offerings of stock at these lofty valuations.  When that happens holders will be diluted through the additional stock offerings and the cash the company acquires will likely be squandered in a capex buying binges.

ChpBstrd

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #17 on: January 15, 2020, 08:12:39 PM »


My conclusion is that a distrust of expertise and evidence is a cultural theme that isn’t based on the performance of those methods. It’s based on something else - maybe declining social cohesion or the easy fabrication of information on the internet.

If  humanity's average IQ is  declining,  I don't think as of 2020 the decline's magnitude is all that significant in terms of the number itself.

This is not to say that  declining average IQ  doesn't factor into  "something else."

Without reading the links, I assume this is semantics because how can IQ "decline?" A 100 IQ is the center of a bell curve.

The average IQ is 100 at any given time, but the average person today is much smarter than the average person a couple of generations ago. The Flynn effect is an interesting subject - I find it inspirational.

https://en.m.wikipedia.org/wiki/Flynn_effect

vand

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #18 on: January 16, 2020, 04:00:24 AM »
I think CAPE in the US is slightly skewed, so things are not *quite* as bad as it would suggest.

The corporate tax cut is only factored in for 2 of the past 10 years.  When you make a substantial cut to corporate taxes, stock price inflation immediately follows, because you've boosted corporate profits.  Reducing corporate tax rates from 35 to 21 percent(such that corporations now keep 79% instead of 65% of earnings) is substantial in terms of its impact on stock valuations.  That's not to say stocks are cheap - they're not - but they're not quite as expensive as the traditional CAPE metric would suggest.

Does CAPE over 2 years tell us anything?

CAPE calculator:
https://dqydj.com/shiller-pe-cape-ratio-calculator/

Current (10 Year) 33.992 Median 16.242
Current (2 Year) 39.639 Median 14.934

I would doubt there is any significant correlation. 2 yr is basically the same as 1yr, ie current P/E, and we know that current P/Es are not predictive in short term returns.

I found this a very interesting article:

https://ofdollarsanddata.com/the-investors-fallacy/

10yr historic vs 10yr future return has -0.19 correlation
20yr historic vs 10yr future return has -0.83 correlation

« Last Edit: January 16, 2020, 04:04:02 AM by vand »

js82

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Re: ‘Gut Feelings’ Are Driving the Markets
« Reply #19 on: January 16, 2020, 05:23:37 AM »
Greater fool theory?

Good article and as I’ve detailed (too) many times on the MMM forums, CAPE and PE ratios are extremely high and will probably revert at least closer to the mean. But who knows when, or if they reversion will be back to the mean or maybe a higher new normal?

For far too long I got wrapped up around the issue of high CAPE and PE ratio’s. Then I finally realized that the world does not end at the US border. There are all sorts of markets outside the United States with valuations that look a little more rational to me.  So, I focus on those instead.

I think CAPE in the US is slightly skewed, so things are not *quite* as bad as it would suggest.

The corporate tax cut is only factored in for 2 of the past 10 years.  When you make a substantial cut to corporate taxes, stock price inflation immediately follows, because you've boosted corporate profits.  Reducing corporate tax rates from 35 to 21 percent(such that corporations now keep 79% instead of 65% of earnings) is substantial in terms of its impact on stock valuations.  That's not to say stocks are cheap - they're not - but they're not quite as expensive as the traditional CAPE metric would suggest.

I've also wondered how stock buybacks affect valuation.

My understanding is that in the past decade, stock buybacks have skyrocketed compared to before.

Are there good resources about this? Or how changes in reporting affect actually


Typically valuation is a function of expected return on investment.  This sets a company's stock price relative to alternative investments(for example, bonds).  Anything that affects the expected return(typically earnings) affects the stock price.  However, changing taxation will have the same effect as well.

While stock buybacks boost prices, they don't *directly* increase valuation(or more specifically, change the expected price of a stock in terms of earnings per share) - they simply decrease the number of shares of stock outstanding, so that the expected return of future profits to shareholders is larger on a per-share basis, and share price increases.  However there's also a secondary, smaller effect that theoretically should boost valuations, because money returned to shareholders via buyback is more tax-efficient(in the US) than dividends, that does have some effect on making a company that prefers buybacks more valuable than another equally-profitable company that returns the same amount of money to shareholders via dividends.
« Last Edit: January 16, 2020, 05:26:21 AM by js82 »