Stock Market Overvalued?

[obgyn65]

Additionally, without the bailout of the largest investment banks and others, a more massive collapse of the stock exchanges would have detonated a worldwide financial collapse. The stock market, IMO, is still much overvalued.

I have little doubt that on an historically basis stocks are overvalued. However the real question is what about on a relative basis? Are they overvalued compared to bonds, real estate, oil etc? I honestly don't know.

 

[chinaco]

A comment about Ben Graham on stock allocation and P/E.

Graham explains it this way:

“The sound reason for increasing the percentage in common stocks [beyond 50%] would be the appearance of ‘bargain price’ levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high.”
​

Benjamin Graham on Asset Allocation

 

[brewer12345]

Why is it that he same exact movie, with the same exact script, with occasionally different actors, gets replayed over and over again?

Doesn't anyone ever learn? Hell, we just saw this movie three years ago. You'd think we'd remember how it ended.

I was thinking the same thing. That said, for now there ae different circumstances for the same junk bond deals. Absolute leverage levels are lower in these deals (since lots of them reduced leverage by defaulting), and the economic picture is improving steadily (as opposed to peak leverage deals being done at the top of the cycle). I don't like seeing PIK toggle note deals being done by CCC-rated issuers to fund dividends to sponsors, but at least I am not seeing scads of LBOs where the debt structure on the target is so large that at cyclical peak earnings the company can barely interest on the debt (let along fund cap ex or pay down any debt over time). I take this to mean that there is room for this to roll along for a bit, although I want t of the junk market these days.

 

[FIREd]

I think the overall market in overvalued. But there seems to be pockets of fairly valued, high quality stocks out there. I usually buy index funds but I think that, in this climate, one has to be a bit more choosy.

 

[NW-Bound]

... But I can't resist trying to wring a few more bucks out of the bull so I move a percent here and there at every time we hit a new high...

Additionally, I look at my stock holdings, and thought that their projected P/E ratios in the low teens were not so bad. Of course, in the past when the economy went sour, all those earnings projected by analysts went out the door. No companies can prosper with a declining economy back drop. Conversely, an improving economy is a rising tide that lifts all boats, leaky ones too.

So, to me, the question is still "Is the economy improving?", and I believe it still is. Hence, my main reason for hanging on to my stocks a bit longer. And as greedy as I am, I might still try to wring a couple more of bucks out of each share by writing covered calls.

 

[Lsbcal]

If bond rates move up and stocks continue the trajectory... eventually some investors will reevaluate the risk/reward balance and lighten up on equities. Seems to be a common move for certain contrarians.

Do you know of any research on the topic of AAs based on valuation or other factors?

Yes I agree that stocks and bonds are competitive financial assets and so there is some linkage. I've not seen any models of what that linkage really is. We are back to 1950's interest rates and in those years the order of returns for FI was cash -> then short term bonds -> then intermediate term bonds.

I imagine there is some research on AA's and valuations. Probably plenty of papers which I don't know about. At Bogleheads there was a thread or two on PE10 and AA modification.

Personally I've constructed my own portfolio options in spreadsheets with data going back to about 1970. I've tried a lot of combo's involving variables like PE10, PE5, PE1, interest rates. I've also tried rules like: lighten up if we are 36 months past the last SP500 low and the last 12 months gain was >50%.

What seems to stand out in my personal research is that the best thing was to stick with the highest level of equities I could tolerate and continuously rebalance. But that was in the context of going to short term bonds when a timing model said to do so. The timing model had those valuation considerations in it already.

My guess is that adjusting AA based on a few rules might give better backtest results then straight buy-hold. Rules one might consider using data from public sources:
1) relative gains over recent months for stocks versus short term bonds
2) PE10 levels
3) whether the yield slope has gone negative over recent months (10yr Treasury - 3mo Treasury)

To do this yourself is a lot of effort and only fun if you enjoy analysis a lot.

 

[dex]

Market Harmonics - Investors Intelligence Survey

Check out the top chart - compare 2007 with now

http://www.traders-talk.com/mb2/index.php?showtopic=129771&st=0&#entry571943

 

[W2R]

What goes up, must come down.

YouTube - Blood, Sweat & Tears - Spinning Wheel

Also, what goes down, must come up...

This is as far as I would venture to go with this sort of analysis. My approach relies on asset allocation, balancing, enjoying the highs, and hanging on through the lows.

 

[dex]

What goes up, must come down.

Also, what goes down, must come up...

This is as far as I would venture to go with this sort of analysis. My approach relies on asset allocation, balancing, enjoying the highs, and hanging on through the lows.

I think we need a couple of new general forum rules in addition to Godwin's Law.

You hit on one addition - adding a music video to a post (not about music).

I think the another one is adding a video of cute cats.
YouTube - 10 Cutest Cat Moments

All three indicate the thread is coming to an end.

 

[haha]

I think we need a couple of new general forum rules in addition to Godwin's Law.

You hit on one addition - adding a music video to a post (not about music).

I think the another one is adding a video of cute cats.

All three indicate the thread is coming to an end.

Bad mood today, Dex?

 

[easysurfer]

I've been happily just following my Total Stock Index and Total International Stock Index funds to notice if the market is overvalued or not. So I really can't say either way

 

[dex]

Bad mood today, Dex?

I've had mine ... what about you?

YouTube - Bacon is... Happiness

 

[freebird5825]

I've had mine ... what about you?

Later today...Mr B is watching baseball right now.

 

[NW-Bound]

Well, aren't there things that come down and never can get up? Like the Nikkei that has been down for 20 years, and just as one thought it would not happen, it would set a new low occasionally.

But I guess at least that is not as bad as Enron, Global Crossing, WorldCom, and recently, Bear Stearns, Lehman Brothers, etc... They went down, then simply disappeared. Looking back through the ages, we find things that went up invariably came down, but the reverse was not true.

Time for some gloomy music...

YouTube - Kansas Dust in the Wind live unplugged

 

[HFWR]

I wonder what that Nikkei chart looks like with dividends...

 

[NW-Bound]

Good point!

I spent a few minutes on the Web, but could not find a graph showing total return of the Nikkei 225 over the same period. However, the yield has been fairly low, like under 1% in 2007. It is currently about 2%. So, added up over the past 20 years, it would not make much of a dent to compensate for the drop from 40,000 in 1990 down to under 10,000 today. And then, we would have to factor in the inflation effect over that time too.

Bleak, bleak, bleak! I shall post another gloomy song if I find a suitable one.

 

[sheehs1]

Wonder what the stock market will do when the next political battle ...which is...about increasing the debt ceiling comes front and center. We hit the current $14.212 trillion dollar debt ceiling May 8th. Emergency measures will take it to July 8th. Republicans have vowed not to vote to increase the ceiling without other spending cuts. Anyone think ....just the "implied" threat of a U.S. debt crisis and the political wrangling .....will have an affect of the markets. Or will the markets shrug it off...like it has shrug everything else off this year.? I say "implied" threat...because they will NOT let this happen. (I pray anyway.....) However....it will be used politically.

 

[Lsbcal]

Have you ever heard or observed toddlers in modes of parallel play? That's what some of these threads remind me of. Of course, all the toddlers are cute, especially yours.

 

[NW-Bound]

As a gloomy and grouchy person myself (my wife often tells me this), I like to take a irreverent approach in my e-Mails to personal friends as well as my posts here to counter my pessimistic nature. Besides, we geezers all yearn to be young again, whether we admit it or not. But to go back all the way to toddler years? My, I don't remember my toddler years, do you?

The earliest memory I can place unquestionably was when I was 4, as I described here.

 

[Htown Harry]

Here is a short interview with a guy who sees it as I do, fund manager Donald Yacktman.
Kiplinger.com

Here's another, Ha.

Hold, Don't Fold - Barrons.com

 

[jimnjana]

Wonder what the stock market will do when the next political battle ...which is...about increasing the debt ceiling comes front and center. We hit the current $14.212 trillion dollar debt ceiling May 8th. Emergency measures will take it to July 8th. Republicans have vowed not to vote to increase the ceiling without other spending cuts. Anyone think ....just the "implied" threat of a U.S. debt crisis and the political wrangling .....will have an affect of the markets. Or will the markets shrug it off...like it has shrug everything else off this year.? I say "implied" threat...because they will NOT let this happen. (I pray anyway.....) However....it will be used politically.

If a meaningful agreement on deficit reduction is achieved then I think it becomes very bullish for stocks. Meaningful means to me that spending is cut across the board, tax code changes are implemented, primarily corporate tax rules. I also think that they need to give corporations one last gift, a tax holiday on the corporate profits sitting in foreign accounts that if they spent these funds in the US would produce some meaningful job growth.

 

[chinaco]

Blackrock CEO interview... he says:

• The stock market is fairly priced
• Oil prices could be a problem.. a wildcard
• QE2 wind down is priced in the market. Bias will be toward higher rates, but rates will not go too high unless inflation moves up and persists.

BlackRock CEO: Stocks are undervalued - Video - Business News

 

[brewer12345]

Valuation fears aside, there are some really compelling values floating around at present. Go sift through the market and you can find stupidly cheap stocks without trying that hard.

 

[rescueme]

Equities currently overvalued? Don't know (and really don't care ).

The equity portion of DW/my joint portfolio has risen a few points above our AA target, while my retirement income cash bucket has fallen just below its minimum holding of 3 years gross income target.

I sold equities last week (same thing I did late last year, for bonds - due to GNMA "overperformance") to add to cash, and bring me back to the mid-point of my 3-4 year gross income cash target.

IMHO, it's a bit easier when you've retired and already hit your "number". In most cases, you no longer have to swing for the moon, but rather protect what you have, while insuring you have enough cash/income to get you over the next market "hiccup", regardless of what it may be...

 

[wildcat]

Well, I am far from retired and trying to protect my returns from the last 2 years .

The stuff I own and what has been on my radar, for the most part, is fully valued IMO. I am at the point where I question whether I should continue to hold some equities I bought at bargain prices & seem fully valued but have great businesses (and growing dividends). I trimmed a tiny portion just to see the prices go much higher (story of my life).

Seems to be more downside than upside at this point but I have been saying that for a while now. I follow LA based FPA funds and their commentary. Their chief investment guy is calling for another crisis related to our government finances in 2-5 years & he has a pretty good track record (a bit early at times but often right).