Is valuation a good timing strategy?

[Lsbcal]

Recently there have been some people worrying about getting into (or out of) stocks because equities were maybe "high" now. That reminded me of a time in the year 2000 when Abbey Joseph Cohen (Goldman spokesperson) had been asked about stock valuations and she replied that valuations were not a very good indicator for determining market tops. I just remember her dissing valuation as a timing mechanism.

Here is a chart Morningstar updates with their market valuation data:

the chart link is here: Market Fair Value by Sector, Industry, Super-Sector, Index | Morningstar

Notice how this M* chart shows the market currently slightly overvalued. The main thing that sticks out to me is there were several years in the overvalued territory at much higher levels of overvaluation before we entered the nasty bear market of 2008.

 

[Felix Mulier]

Recently there have been some people worrying about getting into (or out of) stocks because equities were maybe "high" now... The main thing that sticks out to me is there were several years in the overvalued territory at much high levels of overvaluation before we entered the nasty bear market of 2008.

We are sitting more out of stocks than in at the moment because we just retired and wanted to "take a breath" - at this unique time in our lives - from market variability that could have severely damaged our nestegg. It was critical for us to preserve capital - we couldn't take another hit like the 39% we got in 2009 (not and stay FI anyway!)

That said, finding a re-entry point is a challenge to say the least! And we're not alone if you look at the meager influx of assets from bond into stock funds by non-institutional investors. No one knows how to make a move.

Thank you for posting the chart. The thing I found most interesting was the difference in valuations among the sectors. Last week when the Dow hit its all-time high, only 4 out of 10 sectors were higher than they were in 2007 before the crash. There is a lot of hoopla in the news about record-breaking highs. I say "Yeah, but look under the covers - you might not like what you see!"

Any thoughts out there about using value cost averaging as a mechanism to move assets from bond funds into stock funds?

 

[photoguy]

You might want to take a look at W. Pfau's paper on market timing via PE10

http://mpra.ub.uni-muenchen.de/29448/1/MPRA_paper_29448.pdf

Basically he concludes that while the overall geometric mean return was the same as buy & hold, the yearly variance was lower (i.e. better on a risk adjusted but not absolute scale). But there's no notion of confidence interval in the results and the author mentions several times that the results are "sensitive" to various decision points.

 

[FIREd]

I use valuation to calculate my target AA. My "neutral" AA is 50/50. As stocks get cheaper, my target equity allocation goes up. As stocks get more expensive, my target equity allocation goes down. The main risk of this strategy IMO is fighting momentum (you would have missed out on the P/E expansion in the late 90's).

 

[haha]

I use valuation to calculate my target AA. My "neutral" AA is 50/50. As stocks get cheaper, my target equity allocation goes up. As stocks get more expensive, my target equity allocation goes down. The main risk of this strategy IMO is fighting momentum (you would have missed out on the P/E expansion in the last 90's).

There is likely no way to avoid both underperforming in blowoffs, and being caught in abrupt downturns. You just take your choice. I choose to avoid being caught in stocks with high valuations, when the bottom drops out. If your valuations are never stretched, you will recover without needing another crazy bull market, which while likely, my not come in time. (Like Nasdaq since dotcom downfall.)

Ha

 

[Animorph]

No telling how long the market can stay crazy.

 

[dtbach]

Have we been in a Bull market the last 4 years or have we been recovering from the Bear of 2008-2009? I think we have been in a recovery mode, the Bull market is now upon us. 2000-2012 was an entrenched bear market, which may well give way to a secular Bull market where we might see 25,000 or 30,000 on the Dow.

And why not? Will anyone retire in the future if the market never moves beyond what it is now? When I started investing in 1983 I think the Dow was a bit over 1000. By 2000 (17 years) it got to 12000. In the last 12 years it has moved up only 2000 points, or less than 200 points a year.

Just as the great bull of the 80's and 90's was spawned by the terrible 70's, the future bull will come from the Great Recession of the last decade.

There is still a lot of fear out there, unemployment is high, lots of money on the sidelines, bonds paying next to nothing. Of these are bull markets born.

 

[ScottishCanadian]

I like to think of the time in timing. The younger the investor the longer the time horizon before funds will be required. A byproduct of investing while one is younger is the ability to lower their risk profile to meet investment goals. A balanced approach should factor how close the individual is to using the funds. As an individual gets closer to using investment assets they should track an asset portfolio that provides income, growth, or dividend paying stocks that match their retirement needs, and requirements for tax efficiency.

Once you get uneasy with the market fundamentals then it's a good time to rebalance the asset allocation and move to higher quality assets. This might be called prudence not market timing.

Of course each investor will have their own opinions and accept the risk associated.





ScottishCanadian

 

[brewer12345]

cough *hocu5* cough

 

[Tyro]

Have we been in a Bull market the last 4 years or have we been recovering from the Bear of 2008-2009?

That is the question, even for P/E10 Timers. According to (at least) some... (referring to the bottom half of the following chart)...

....when the P/E10 has fallen from the top [quintile] to the second quintile, it has eventually declined to the first quintile and bottomed in single digits. Based on the latest 10-year earnings average, to reach a P/E10 in the high single digits would require an S&P 500 price decline below 550. Of course, a happier alternative would be for corporate earnings to continue their strong and prolonged surge. If the 2009 trough was not a P/E10 bottom, when might we see it occur? These secular declines have ranged in length from over 19 years to as few as three. The current decline is now approaching its 13th anniversary.

Or was March 2009 the beginning of a secular bull market? Perhaps, but the history of market valuations suggests a cautious perspective.
Is the Stock Market Cheap?

Tyro

 

[yakers]

cough *hocu5* cough

Don't go there
Must be able to engage wth valuation without digging up this part of history.

 

[yakers]

I love the charts and the Callan periodic return chart. They show something true but I have not figured out how to use the information in a tactical way, only in a strategic way.

Just like I hold on to my now small position in my "biggest loser' stock (MGM, down 60%) to remind me that I am not as smart as I think I am.