Shades of the 1980s ...

[Lsbcal]

Our market (blue line) is starting to feel a little like the 1982 rise off the lows (red line). I still remember the 1987 crash, market peaked in August 1987 and in less then 2 months a crash. Still 1987 finished the year with the SP500 rising 5% and went on to recover ... that time.

I'm not sure what I will do if the market starts climbing at an accelerated rate like in 1987 ... maybe stick to my plan? Rebalanced and sold 1% today as per plan.

 

[haha]

Whatever these pictures may or may not say, I would say that this market rise has zero to do with 1982.

Look at some fundamental data, like a chart of PE10 before the beginning of the rise in '82, and however months into it you chart shows. Huge difference in CAPE valuation.

Ha

 

[Lsbcal]

I use PE10 a bit but find it's not a very good timing methodology. I tend to agree with people like Swedroe who say that future earnings estimates are stronger price drivers. However, nobody knows what those future earnings really will be hence no crystal balls.

Note the message on the chart, it's instructive for a historical perspective but not going to tell us where things are going. Still fun to blab about where it might go, don't you think?

 

[bUU]

The most instructive insight I get out of the chart is that no two lines have been the same in the past, and therefore I believe the safest conclusion is that the blue line won't be the same as any of the previous lines, but will chart a path of its own.

 

[haha]

I think PE10 is by far the most valid measure long term. Short term measures are a dime a dozen, and I believe often misleading. One day one works, the next day another one. How choose which one to employ? I do agree with you that is one were to sell out because of high PE10, he is very likely to fell remorse , because the most likely guess is that at any time, the market will continue doing whatever it has been doing.

With PE10 one is not really interested in price drivers, price movement, or anything other than historically speaking, does this index to appear to be value-priced or not?

I think the willingness and ability to disdain this remorse is a price of truly successful market operations, once one has deviated from buying and holding of a broad index.

Many, perhaps most of us, cannot imagine anything greatly different from the recent past and present. But as we know, these discontinuities must sometimes happen, because we know that no trend has ever lasted forever.

It helps to be stupid. I buy things that no one but an ignoramus would even consider. Sometimes it fails, but given time, much more often it succeeds nicely. Some people have made good money from short term technical analysis. I never have, so I no longer try.

Ha

 

[FIRE'd@51]

Whatever these pictures may or may not say, I would say that this market rise has zero to do with 1982.

One similarity (which I don't think is unimportant) is that we are in a market, like that of the early 1980's, that really hasn't gone anywhere for 13 years.

 

[Lsbcal]

... Some people have made good money from short term technical analysis. I never have, so I no longer try.

Ha

In posting this sort of chart I'm hoping the takeaway for many will be that the financial markets are always delivering surprises because the future is truly unknown.

I personally do not engage in short term market timing and only make monthly changes (if at all) based on a carefully researched long term plan. For instance, my sale of a 1% equity position today is based on a rebalance plan that is long term.

Sometimes I do engage in short term what-if's partially for learning purposes and partly for fun.

There are so many people coming to these sorts of forums and asking basic questions that show they haven't done their homework. For them it might be good to know that an October 1987 crash can happen but the flip side is that it's not the end of the world though it would seem that way at the time. It's good to learn here or elsewhere before risking one's hard earned reserves.

 

[haha]

One similarity (which I don't think is unimportant) is that we are in a market, like that of the early 1980's, that really hasn't gone anywhere for 13 years.

This is absolutely true. But where you are depends on two things- where you started, and how far you have progressed. 13 years of going nowhere off a big low valuation bottom (1974) is quite different than 13 years of going nowhere off the highest valuation high of all time (1999 in America).

I believe investors are more or less hardwired to adopt one approach or the other. One works for one investor, another for another investor. Mine is bottom fishing. It has not been spectacularly successful, but OTOH is has been reasonably successful over a long time of applying it. I retired >25 years ago, do not live like a monk, and am a long way from having money troubles. I very likely won't have to make a date with death to be sure I do not run out of funds.

Ha

 

[FIRE'd@51]

This is absolutely true. But where you are depends on two things- where you started, and how far you have progressed. 13 years of going nowhere off a big low valuation bottom (1974) is quite different than 13 years of going nowhere off the highest valuation high of all time (1999 in America).

Actually, I was thinking of starting at the 1966 highs, when the Dow first closed above 1000.

 

[FIRE'd@51]

Actually, I was thinking of starting at the 1966 highs, when the Dow first closed above 1000.

From the Ibbotson-Sinqefield data for the S&P 500 (compound annual returns)

end of 1965 until the end of 1982: 0% real return
end of 1982 until the end of 1999: 14.6% real return
end of 1999 until the end of 2012: -0.75% real return

 

[Lsbcal]

From the Ibbotson-Sinqefield data for the S&P 500 (compound annual returns)

end of 1965 until the end of 1982: 0% real return
end of 1982 until the end of 1999: 14.6% real return
end of 1999 until the end of 2012: -0.75% real return

If one concentrates a bit, one can pick out some of these time frames on this "decades" chart:

 

[haha]

I have no clue why I involved myself in this discussion. To me it's as clear as the nose on my face that it matters not how you got to todays valuation, or how many years it took, or when you started, but only what todays valuation is by some solidly valid method. PE10 is my favorite ; there are others. And there are also many less rational measures. One of the few things that seem to be constant about financial markets is that over the very long term they are mean reverting

I realize that this will not appeal to all, and that is good; it's what makes markets. I am a practictioner, not a teacher. I am happy that others are happy with other approaches, because I like people to be happy.

Ha

 

[MichaelB]

From the Ibbotson-Sinqefield data for the S&P 500 (compound annual returns)

end of 1965 until the end of 1982: 0% real return
end of 1982 until the end of 1999: 14.6% real return
end of 1999 until the end of 2012: -0.75% real return

What were profit margins like in the '82 timeframe and how do they compare with current levels?

 

[Lsbcal]

What were profit margins like in the '82 timeframe and how do they compare with current levels?

They were probably skewed by the high (declining) inflation in 1982. 12 month inflation in Jan 1982 = 8.3%.

 

[FIRE'd@51]

One of the few things that seem to be constant about financial markets is that over the very long term they are mean reverting

This is precisely the point I was trying to (perhaps badly) make. Long periods of below-average returns tend to be followed by long periods of above-average returns.

 

[Lsbcal]

Ha mentioned PE10. Regarding the 1987 crash, I think that was attributed to a panic in the equity markets and not to a business cycle decline. So that is why to me it stands out as something scary that appeared to come out of nowhere from a period of euphoria.

Looking at the PE10 data I rank it by how high it's been since 1920. A rank of 100 is the highest since that period. A rank of 80 means that 80% of the time the PE10 was lower. Some ranks:

79 in August 1987
54 in November 1987

40 in March 2008
85 in July 2013

So PE10 is relatively high now. It was high in 1987 and maybe that was what helped to add fuel to the fire when a catalyst came along to set off a market panic? Just a thought. Maybe a worry.

P.S. A discussion of Black Monday in October 1987 is at Black Monday (1987) - Wikipedia, the free encyclopedia

 

[1st Tee]

Don't remember 87 except for a few stocks my broker was pushing.
PE10 is high but I don't expect a crash, panic, etc.

Agree with FIRE'd@51 on his comments about "Long periods of below-average returns tend to be followed by long periods of above-average returns".

Lots of lean and mean companies and it wouldn't take much to get a sharp rise in earnings
with just a little top line growth ( Europe starts coming back, etc).

 

[Hamlet]

Shouldn't the interest rate environment have a large effect on the PE people are willing to pay?

It certainly seems like a higher PE for equities makes sense when the risk-free rate of return is pretty close to zero than when it was double digits.

I think PE10 is by far the most valid measure long term. Short term measures are a dime a dozen, and I believe often misleading. One day one works, the next day another one. How choose which one to employ? I do agree with you that is one were to sell out because of high PE10, he is very likely to fell remorse , because the most likely guess is that at any time, the market will continue doing whatever it has been doing.

With PE10 one is not really interested in price drivers, price movement, or anything other than historically speaking, does this index to appear to be value-priced or not?

I think the willingness and ability to disdain this remorse is a price of truly successful market operations, once one has deviated from buying and holding of a broad index.

Many, perhaps most of us, cannot imagine anything greatly different from the recent past and present. But as we know, these discontinuities must sometimes happen, because we know that no trend has ever lasted forever.

It helps to be stupid. I buy things that no one but an ignoramus would even consider. Sometimes it fails, but given time, much more often it succeeds nicely. Some people have made good money from short term technical analysis. I never have, so I no longer try.

Ha

 

[haha]

There is a lot of literature about that very point. In my experience, people are always attracted to the idea that you mention. But unfortunately you cannot specify at the time of your investment that interest rates will always stay where they are.

So I don't try to debate or discuss this. It's on the internet, for anyone to read and decide for himself.

Ha