Bubbles all over the place

[CaliforniaMan]

Quote:

Originally Posted by Proteus126 Low rates support high P/E multiples on stocks. 2% S&P 500 dividends plus the probability of short to intermediate term asset growth make it the only game in town. Low rates look like they will continue for quite some time. The S&P 500 has weathered several (4 ?) moderate downturns in the past 24 months, motivated by a variety of fears (valuation, oil, Europe) and has a solid floor built in. Exuberance is low but fear has abated a bit. Sounds like a setup for lower volatility and steady upward price creep in the short term. Given the globally entrenched low rate environment, I feel that the S&P is correctly priced for this low-rate regime or just a tad high but nowhere near the bubble-popping stage based just on index price. In fact I think it is poised to move 10% higher in the next 6 months. One of these years, rates will be higher. At that time, multiples will have contracted significantly and we will all feel poorer in our stock accounts. Play it like we always play it, by picking the asset allocation you like based on risk tolerance and needs and rebalancing every 3 to 6 months, pocketing the stock gains along the way. Keep in mind a moderately ugly scenario (30%-40% correction lasting 1-2 years, say) and make sure that your plans and asset allocation are tuned such that you can live with it. The higher it goes from here forward the larger the eventual correction. I honestly could see the S&P 500 at 1500 or 2500 in the next 12 months. I feel that 1500 is less likely. I just have no clue and won't bother trying to time it, other than using dips to shovel a little cash into the Roth if I manage to catch it.

+1
I agree, and very nicely put.

[RobbieB]

No fear of bubbles have I says me -

[NW-Bound]

The market is fully valued now, with the high P/E maybe justified by the low interest rate and inflation.

The chance of it going up a bit is about the same as for it going down a little.

However, the chance of it going down a lot is higher than for it to go up a lot. What wonderful things can happen for stocks to go up a lot? Interest rate to go even lower, to negative? Corporate earnings to go through the roof? In contrast, all kinds of bad things can happen for it to go down a lot (and you do not even need an asteroid strike).

So, my perception of the risk level causes me to cut back my stock AA to 50%, while I traditionally ran 70% to 80%.

And I will continue to enhance my yield by writing covered calls on the stocks that I hold, and alternating that with writing cash-secured puts on my cash, as I see fit.

[kgtest]

Quote:

Originally Posted by NW-Bound The market is fully valued now, with the high P/E maybe justified by the low interest rate and inflation. The chance of it going up a bit is about the same as for it going down a little. However, the chance of it going down a lot is higher than for it to go up a lot. What wonderful things can happen for stocks to go up a lot? Interest rate to go even lower, to negative? Corporate earnings to go through the roof? In contrast, all kinds of bad things can happen for it to go down a lot (and you do not even need an asteroid strike). So, my perception of the risk level causes me to cut back my stock AA to 50%, while I traditionally ran 70% to 80%. And I will continue to enhance my yield by writing covered calls on the stocks that I hold, and alternating that with writing cash-secured puts on my cash, as I see fit.

Seems logical to me. No noise is not always good. Noise is usually not good.

[Lsbcal]

Quote:

Originally Posted by NW-Bound ... So, my perception of the risk level causes me to cut back my stock AA to 50%, while I traditionally ran 70% to 80%. ...

OK, I tend to agree with some of your thoughts. But when I've done some studies of methods to cut back when markets were in such states, I've not come up with a good way to avoid missing gains. I think it is only in the extremes where it is a good idea to dial back. Are we there yet?

Here is a table I update yearly around August. It is from Vanguard's site for various of the style asset classes:



It shows that most of these asset classes are about 10% to 40% above their 2011 values. I don't have year 2000 data but I would bet that was really extreme for large growth (LG in the table). To me these asset classes are not extreme enough out of bounds to make a move. I personally hold the value tilted portions ... vtv, voe, vbr.

[Markola]

Quote:

Originally Posted by NW-Bound So, my perception of the risk level causes me to cut back my stock AA to 50%, while I traditionally ran 70% to 80%.

Good luck and I'm sure you're not alone. I thought about getting more conservative, too, but I'm still a working stiff and have decided to leave my 80/20 AA alone and keep piling up shares, come what may. Fiddling around has cost me more money in the past than ignoring the portfolio and buying more of it. There's a chance things won't go up or down anytime soon but just sideways for a long while.


Sent from my iPad using Early Retirement Forum

[NW-Bound]

Quote:

Originally Posted by Lsbcal ... Here is a table I update yearly around August. It is from Vanguard's site for various of the style asset classes: It shows that most of these asset classes are about 10% to 40% above their 2011 values. I don't have year 2000 data but I would bet that was really extreme for large growth (LG in the table)...

I just found out that it is difficult to get historical P/E for various market segments. Surely, somebody has it, but does not want to share.

The only thing I have found is the following chart showing that in 2000 the Nasdaq P/E went through the roof, while that of the S&P reached 30.

[NW-Bound]

Quote:

Originally Posted by Markola ... There's a chance things won't go up or down anytime soon but just sideways for a long while...

Hence, my hedge by doing options on the side to get a bit more spending money, while maintaining 50% stock AA. If the market just bounces around, I can pick up another 1% a year with my conservative option play, and maybe even 2% if I get more aggressive.

I have no more fresh money to buy stocks if the market crashes, so need to be more conservative than when I was still working.

[Lsbcal]

Quote:

Originally Posted by NW-Bound ...Nasdaq P/E went through the roof, while that of the S&P reached 30.

From Shiller data the SP500 PE max'd at 35.3 in July 1999.

I remember Abbey Cohen saying that valuations weren't a particularly good timing mechanism. That was sometime in 2000 I think. Perhaps a bit of right and wrong in that statement.

At any rate, we are nowhere near such extremes and were not in 2008. In 2008 the stock market suffered from collateral damage of the real estate bubble. So yes, could be something that happens in our other markets (like bonds?) or even in China. Could also be a few years off ... who knows.

[NW-Bound]

Nothing is a perfect mechanism for timing. It's all a matter of probability. When the P/E is high, it's more likely to revert than to keep going higher. The latter is certainly possible, else I would be 0% in stock instead of 50%.

[haha]

When I read these market discussions, I am always struck by how perfectionistic many investors sound. For example, who is to say that the late 1999 level of Shiller's PE is meaningful, as anything other than a known past high.

A pretty good market timer, Jeremy Grantham, believes that there is little crash risk at present. His reasoning is essentially that there always will be mass stupidity, and that we can count on investors to get really, really stupid before a big move like the one from 2009 to present will end. He is very experienced, and has been quite effective over the years. Still, I prefer not to walk on a slippery mountain slope when it is not necessary. Just because people have walked here at other slippery times and not fallen does not quite cut it for me. Anyone who thinks that a reliable fence can be put around what can happen in markets is not quite home. Over many years, I have found a modestly misanthropic view of human rationality to be an aid to investing. The argument that "there is no other game in town" is specious. My guess is that 5 years of the delta between a very conservative, low duration fund and what an equity first strategy might return over this same 5 years could easily be lost in 6 months of bad luck in the equities.

I strongly prefer making the possible mistake of missing further overvaluation in an already quite overvalued market to getting my ass handed to me if that overvalued market should return to reason. The first error can seriously hurt me. The second can at worst make me miss some of the truffles and Dom Perignon that has recently achieved popularity among certain segments of our membership. I'd rather have $10 vodka and pickled pig's feet anyway, and this I could even buy with my SS payments

Ha

[Lsbcal]

Quote:

Originally Posted by haha When I read these market discussions, I am always struck by how perfectionistic many investors sound. For example, who is to say that the late 1999 level of Shiller's PE is meaningful, as anything other than a known past high. A pretty good market timer, Jeremy Grantham, believes that there is little crash risk at present. His reasoning is essentially that there always will be mass stupidity, and that we can count on investors to get really, really stupid before a big move like the one from 2009 to present will end. ...

Well I tend to like numbers and data and if that sounds perfectionistic so be it.

You probably did not mean it to sound this way but "mass stupidity" is kind of demeaning to whoever is included in that statement.

We investors will differ in these markets and that is what sets prices. I think a gentlemanly respect is the best tack in these forums. I like to hear your opinions and others Ha.

It is a good idea to compare ideas, especially contrary ones. I also like to keep out of negativity which can pervade these discussions. And yes, I have been wrong at times and am (grudgingly) happy to admit it.

[RobbieB]

I just ordered up 4 ounces of fresh summer truffles. Cheap too, only $120.

Have fun!

[audreyh1]

Quote:

Originally Posted by UpAnchor At last, someone thinks like me! But then I've always been a practitioner of rubber math.

A bad habit of mine too. I always instinctively felt like our early 2005 RV purchase was free, LOL!

[audreyh1]

Quote:

Originally Posted by GrayHare When a bubble's risk gets too high the standard approach is to hedge. For example, if you deem Treasuries too pricey you can short them via something like TBT. It's another way to diversify. One assets class that IMO is less bubbly is real estate.

Shorting overvalued markets is a risky strategy unless you have very deep pockets.

[Al18]

Lsbcal,
That's interesting P/E data from Vanguard. If they have posted mean P/E ratios as opposed to average P/E ratios, I would like to see that also. I think the mean values would be much smaller, as there's a few big name stocks with P/E ratios that are thru the roof - like Netflix, Amazon, etc.

[Dawg52]

I've yet to find Dom Perignon at my local Walmart. I guess I will have to stick with Bud Light. Oh well............

[cooch96]

The way I see it, folks are chasing yield because investment grade bonds aren't providing it. Once inflation creeps in (or shoots up), the fed should start to raise rates. Then folks will feel better about leaving cash in treasuries. That will provide impetus for bonds to increase rates. Once people can invest in bonds and get a decent return, yield alternatives will get dumped.

Is that theory sound? Seems like a market timer can wait until at least e fed raises rates closer to a historical norm, like 4-8%. Or maybe even something not ridiculous, like 2%.

[Lsbcal]

Quote:

Originally Posted by Al18 Lsbcal, That's interesting P/E data from Vanguard. If they have posted mean P/E ratios as opposed to average P/E ratios, I would like to see that also. I think the mean values would be much smaller, as there's a few big name stocks with P/E ratios that are thru the roof - like Netflix, Amazon, etc.

All I have done is to copy the VG web page data. The VTV page is posted here: https://personal.vanguard.com/us/fun...tExt=INT#tab=2

Here is the comparable page from May 2011:



Amazon and such would be in the LG category i.e. the page for VUG (VIGRX as a fund). I don't have that from 2011 but the top 10 holding now can be found on that VUG page here: http://www.early-retirement.org/foru...eply&p=1766675

I notice that some articles have mentioned your concern about the popularity of these large cap growth stocks (Apple, Alphabet, Amazon, Facebook) and interestingly the PE for VUG has gone up the most since 2011 i.e. about 40%.

[Hamlet]

Quote:

Originally Posted by NW-Bound The market is fully valued now, with the high P/E maybe justified by the low interest rate and inflation. The chance of it going up a bit is about the same as for it going down a little. However, the chance of it going down a lot is higher than for it to go up a lot. What wonderful things can happen for stocks to go up a lot? Interest rate to go even lower, to negative? Corporate earnings to go through the roof? In contrast, all kinds of bad things can happen for it to go down a lot (and you do not even need an asteroid strike). So, my perception of the risk level causes me to cut back my stock AA to 50%, while I traditionally ran 70% to 80%. And I will continue to enhance my yield by writing covered calls on the stocks that I hold, and alternating that with writing cash-secured puts on my cash, as I see fit.

This is the way I see it as well. I don't think we are in bubble territory so much as at the very top of what you could rationally value the market at.