Running_Man
Thinks s/he gets paid by the post
- Joined
- Sep 25, 2006
- Messages
- 2,844
I have in recent days given much thought on the market, the move up in interest rates and Cape 10. At it's recent 32.71 it is in the very significantly overvalued range. I have used this for a great many years as one of my gauges for over and under inflated markets. It is a very slow long term valuation gauge however, and the long period of time it has kept my stock allocation lower has had a significant opportunity cost, though my personal measure is to grow at 2-3 percent above inflation and not to be worried about market returns.
The recent breakout of long term interest rates, occurring in the month of October gave me pause. The increase in interest rates was long feared and gave many intermediate market panics prior to the actual increase in interest rates that convincingly broke a long term trend. It was as if all the people who feared rising interest rates would drop the market, and the Cape-10 as well, decided that they were foolish and it was expensive to miss out on the rises that occurred after the short term moves.
Even here on several threads in the past serious concerns would be raised on interest rates and the effect on preferred stocks, bonds and the serious risk those pose. Now the board seems full of individuals set to pounce on issues with both barrels should a serious decline occur, but even though interest rates are now higher than 2016 many of the prices of these securities are significantly higher. A sign I feel of too much comfort.
However if one steps back to a view of the Stock Market and Bond Market to the same point of view as the Cape-10, that is from a very long term view, one can see that interest rates do very much appear to have reached a very long term bottom and are breaking out to new highs. Indeed for really the first time since the 1980's they are braking long term moving averages. The offsetting factor to me is the economy, which appears to me to be continuing in an uptrend and the best I have seen in a very long time.
Yet this trend break, which took a couple of years to unfold has had no impact on the market until a few days last week, perhaps because the economy appears so strong. The interesting part is bear markets are typically very fast moving, unless it is the very long term trend is down, in which case they just have a slow downward drift with significant breaks down when either the trend is realized and beginning or near it's nadir.
The Shiller Cape-10 bottomed out in the same time frame - in the early eighties at about 7. This being October we could be looking at this point a years from now and seeing many posts about, "Oh yes well the Cape-10 was nearly 33 interest rates were rising and stocks were clearly overvalued. There was much discussion here about that then, but if you keep committed to your asset allocation you will be ok"
The impact on present value of an increase in the risk free rate for a string of payments for 30 years from 2 percent to 4 percent is a 22 percent decline - which would value the S&P 500 not at 2885 but 2230. There is no talk or fear of that today. Of course the increase in interest rates also has a further effect of reducing corporate income and making productive asset investment more costly, which has been a great feeder of the technology boom. When you can borrow at 2 percent almost all investments increase earnings, unless you are GE.
It just seems to me that we have silently hit a point where a very long term bull trend is definitely ending in interest rates, the Cape 10 may have topped- ( it never surpassed it's 2000 high) and the stock market bull trend could be ending as well (that meaning you do not recover in the next up move to a new high as we did both in 2001 and 2009) and it could be years before anyone would be aware that valuations were just too over-inflated to be reclaimed any time soon. It could be that we just get a repeat of 1966 - 1981 where the market just trades in a price range while inflation consumes values to the down side. But market moves rarely replicate, and with the switch to where almost all investments are in ETF's and funds I would anticipate a change in a long term trend would have it's own form on the next bear round.
Since it is October when this has occurred I did not sell my stock position as I did earlier in the year, which I purchased back at a slight discount to my selling point, but I did take a pretty good position in short term puts, as these thoughts continue to percolate in my brain, and I just felt obligated to purchase some. Indeed it is good it is a Sunday, for as I right this down it strikes me that my thoughts have much validity to them and I think I would buy more puts right now if the market was open.
The recent breakout of long term interest rates, occurring in the month of October gave me pause. The increase in interest rates was long feared and gave many intermediate market panics prior to the actual increase in interest rates that convincingly broke a long term trend. It was as if all the people who feared rising interest rates would drop the market, and the Cape-10 as well, decided that they were foolish and it was expensive to miss out on the rises that occurred after the short term moves.
Even here on several threads in the past serious concerns would be raised on interest rates and the effect on preferred stocks, bonds and the serious risk those pose. Now the board seems full of individuals set to pounce on issues with both barrels should a serious decline occur, but even though interest rates are now higher than 2016 many of the prices of these securities are significantly higher. A sign I feel of too much comfort.
However if one steps back to a view of the Stock Market and Bond Market to the same point of view as the Cape-10, that is from a very long term view, one can see that interest rates do very much appear to have reached a very long term bottom and are breaking out to new highs. Indeed for really the first time since the 1980's they are braking long term moving averages. The offsetting factor to me is the economy, which appears to me to be continuing in an uptrend and the best I have seen in a very long time.
Yet this trend break, which took a couple of years to unfold has had no impact on the market until a few days last week, perhaps because the economy appears so strong. The interesting part is bear markets are typically very fast moving, unless it is the very long term trend is down, in which case they just have a slow downward drift with significant breaks down when either the trend is realized and beginning or near it's nadir.
The Shiller Cape-10 bottomed out in the same time frame - in the early eighties at about 7. This being October we could be looking at this point a years from now and seeing many posts about, "Oh yes well the Cape-10 was nearly 33 interest rates were rising and stocks were clearly overvalued. There was much discussion here about that then, but if you keep committed to your asset allocation you will be ok"
The impact on present value of an increase in the risk free rate for a string of payments for 30 years from 2 percent to 4 percent is a 22 percent decline - which would value the S&P 500 not at 2885 but 2230. There is no talk or fear of that today. Of course the increase in interest rates also has a further effect of reducing corporate income and making productive asset investment more costly, which has been a great feeder of the technology boom. When you can borrow at 2 percent almost all investments increase earnings, unless you are GE.
It just seems to me that we have silently hit a point where a very long term bull trend is definitely ending in interest rates, the Cape 10 may have topped- ( it never surpassed it's 2000 high) and the stock market bull trend could be ending as well (that meaning you do not recover in the next up move to a new high as we did both in 2001 and 2009) and it could be years before anyone would be aware that valuations were just too over-inflated to be reclaimed any time soon. It could be that we just get a repeat of 1966 - 1981 where the market just trades in a price range while inflation consumes values to the down side. But market moves rarely replicate, and with the switch to where almost all investments are in ETF's and funds I would anticipate a change in a long term trend would have it's own form on the next bear round.
Since it is October when this has occurred I did not sell my stock position as I did earlier in the year, which I purchased back at a slight discount to my selling point, but I did take a pretty good position in short term puts, as these thoughts continue to percolate in my brain, and I just felt obligated to purchase some. Indeed it is good it is a Sunday, for as I right this down it strikes me that my thoughts have much validity to them and I think I would buy more puts right now if the market was open.
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