How Expensive is the S&P, Really

C

Craig

Full time employment: Posting here.
Joined
Dec 26, 2004
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I understand that the historic S&P PE average is 16.6 ... bigcharts.com indicates S&P is currently at 19.37. (assuming for the moment both are based on the same calc ...)

The most interesting thing I've seen on this board is how many folks are mainly in cash or bonds ... either the equity holders are quiet, or in the minority.

While the market is clearly not cheap, do you really perceive its level to be the danger some note?
 
Charles said:
I understand that the historic S&P PE average is 16.6 ... bigcharts.com indicates S&P is currently at 19.37.  (assuming for the moment both are based on the same calc ...)

The most interesting thing I've seen on this board is how many folks are mainly in cash or bonds ... either the equity holders are quiet, or in the minority.

While the market is clearly not cheap, do you really perceive its level to be the danger some note?
Click to expand...
Some of us really do believe in asset allocation. When I invest new money or rebalance, I put money where my allocations are below my target allocations. I have been doing that for many years. I don't worry about historical P/E levels, or historical P/E10, or any other metric that attempts to quantify valuations.

P/E is the ratio of current price (which we all know has nothing to do with future performance) and past earnings (which has nothing to do with the future). But even if P/E were a good measure of future valuations, P/E can fall without requiring the market to fall. Some people seem to forget about the fact that the denominator is a measure of corporate financial efficiency.

So why would I let P/E drive my decisions? Market timers think they have a good answer to that question. Allocators don't. :D :D :D
 
Very well put SG.

I think I'm better off feeding the bears than guessing wrong on an allocation shift. Maybe everything's overvalued, but cash doesn't look cheap, either!
 
Warning%20-%20Do%20Not%20Feed%20The%20Bears.jpg
 
- SG said:
Some of us really do believe in asset allocation.  When I invest new money or rebalance, I put money where my allocations are below my target allocations.  I have been doing that for many years.  I don't worry about historical P/E levels, or historical P/E10, or any other metric that attempts to quantify valuations.

P/E is the ratio of current price (which we all know has nothing to do with future performance) and past earnings (which has nothing to do with the future).  But even if P/E were a good measure of future valuations, P/E can fall without requiring the market to fall.  Some people seem to forget about the fact that the denominator is a measure of corporate financial efficiency.

So why would I let P/E drive my decisions? Market timers think they have a good answer to that question.  Allocators don't.   :D :D :D
Click to expand...

I am quite sure I will stick with my "no stocks" portfolio forever. If I did own
stocks I certainly would not "let P/E drive my decisions".

JG
 
P/E is only one of the ratio used in fundamental analysis. There are others: P/S, P/B, ROE, etc.
 
Charles,

I with SG on this. I let my asset allocation control my investing. Set it, forget it - and rebalance yearly.

This is probably the reason that you don't hear too much from this crowd. We don't have to decide what to do everyday, don't have to try to convince ourselves or anyone else.

We basically admit failure to time the markets, and our inability to pick individual stocks. We have looked ourselves in the mirror and know that 'we are the problem' - and to quote unclemick "our best moves have been to do nothing."
 
Unfortunately most of the indicators suggest the equity market is solidly overpriced. While the "E" can change without the "P", many CEO's are suggesting that their "E" is as good as its going to get and likely to go downhill.

Wouldnt it suck if the P and the E both went down? ;)

I do agree with good asset allocation, but my equity purchases in the last year have been limited to buying reits on the dip, energy, stocks in precious metals companies and high dividend paying large cap value stocks.

Heck, the dow and s&p are back to levels they 'achieved' in the 00 bubble. Why is that ok now?

I think if you're buying an S&P 500 index or TSM index right now, you're in for a surprise in the next couple of years. Remember I said that, so when it happens someone isnt prancing around saying its 20/20 hindsight. :-*
 
th said:
I think if you're buying an S&P 500 index or TSM index right now, you're in for a surprise in the next couple of years.  Remember I said that, so when it happens someone isnt prancing around saying its 20/20 hindsight. :-*
Click to expand...

Good surprise or bad surprise? :cool:
 
th said:
I think if you're buying an S&P 500 index or TSM index right now, you're in for a surprise in the next couple of years. Remember I said that, so when it happens someone isnt prancing around saying its 20/20 hindsight.
Oh I think its going to be a very, very bad surprise.
Click to expand...

There probably is a way to put your money where your mouth is. Maybe something like shorting the index, or at least the stocks that you expect to go south. Why go for bragging rights when you are talented enough to make a bunch of money. :)
 
Nords said:
The rest of you voted more than once, right?
Click to expand...

I'm voting twice a month. On the first and 15th.

th, I don't see how it's going to be a surprise if everyone's predicting the doom and gloom from overvaluations. I paid off my debt, I'm looking to move back near family, and I'm keeping recurring expenses low. That will help me through any situation. If I were to put new money in cash it may burn more through inflation while I wait for the right time to buy equities. Besides, I don't know when to buy, so I stick with my allocation. In my situation I'm confident I can withstand a protracted bear or slide, but I have no clue as to whether I could survive a mistimed strategic allocation shift. I changed my avatar to reflect this attitude.
 
All indicators use rearview mirror analysis unless someone's come up with a crystal ball that works recently. The valuation indicators work only to the extent that it is true that "tomorrow will be pretty similar to yesterday." My experience tells me that this statement is not true that often. The past three years is a good example. Doom and gloomers have been pointing to the high valuation levels (as measured by their various rearview mirrors), predicting a massive decline, and encouraging everyone to get out of stocks. Meanwhile, the valuation indicators have been steadily coming down without the catastrophe. If there is a massive decline in the near future, I will not get out in time and will suffer the paper losses. But, on the other hand, I won't have to worry about timing the market right to get back in. I'll be there. :D :D :D

I'm sure there are market timers who will do better than I do. And there will be many who do worse. I can live with that. In fact, I think I can probably live pretty well with that. :D :D :D
 
th said:
I think if you're buying an S&P 500 index or TSM index right now, you're in for a surprise in the next couple of years.  Remember I said that, so when it happens someone isnt prancing around saying its 20/20 hindsight.
Click to expand...

I thought about this and I'm going to say the opposite.  In 2 years you'll be in for a good surprise.  What the heck, I've got a 50/50 shot too.  See you in 2 years.
 
I predict a good surprise, then a not-so-good one, then a bad one, and an unsurprising period followed by two pretty-good surprises.

Thought I'd search for some old predictions on this forum.  Here's one from March 8, 2004 from Mr. John Galt:

   "I predict interest rates will not change much in 2004."
 
Some predictions I read recently but can't find the link to:

20 years from now:

The new generation will develop and embrace a music style that will be unmusical and offensive to people who listen to rap today.

Adults will decry how much lazier and more unproductive the new generation is.
 
I would welcome a nice drop.  Just adds to my dollars down the road.  In the meantime I am sticking with international flavors and large value with the divi's.  No fear.
 
IMO markets are overvalued enough, that returns over the next decade or two are likely to be much worse than historical returns.

But I don't know when the underperformance will happen, and I think that stocks will greatly outperform cash and bonds over the next 50 years, so I'm not holding excess cash or bonds. In fact, only 5% short term bonds/ibonds, rest is stocks or commodity futures.

Grantham gives a good arguement about the US market being overvalued: it seems that we are at peak earnings, and the P/E is high compared to historical numbers. E may also be inflated, which was harder to do when so much of E went into dividends, when div rates were much higher in the past.

We can hope he's wrong, and earnings will increase from here at a good rate (bringing the P/E back to a safe territory and/or causing rising stock prices).
 
lazyday said:
IMO markets are overvalued enough, that returns over the next decade or two are likely to be much worse than historical returns.

But I don't know when the underperformance will happen, and I think that stocks will greatly outperform cash and bonds over the next 50 years, so I'm not holding excess cash or bonds. In fact, only 5% short term bonds/ibonds, rest is stocks or commodity futures.

Grantham gives a good arguement about the US market being overvalued: it seems that we are at peak earnings, and the P/E is high compared to historical numbers. E may also be inflated, which was harder to do when so much of E went into dividends, when div rates were much higher in the past.

We can hope he's wrong, and earnings will increase from here at a good rate (bringing the P/E back to a safe territory and/or causing rising stock prices).
Click to expand...
This sounds like a prudent strategy - simple and effective.
 
The new generation will develop and embrace a music style that will be unmusical and offensive to people who listen to rap today.
Click to expand...

Is that why you're taking out your trumpet to practice? ;)

Q. Why did God invent rap music?
A. So that country music fans would have something to look down on.

Enjoy your trumpet playing!
 
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