How is this NOT a US Stock bubble??

[RenoJay]

I've been convinced by John Bogle and Warren Buffett that over long periods of time, stock prices basically reflect corporate earnings growth + dividends, discounted by prevailing interest rates.

The two screenshots attached are from the Federal Reserve of St. Louis.

One shows aggregate corporate profits. At least to my eye, they look pretty flat since around 2012. The other shows the Fed funds rate. It's up a bit since around 2012.

Meanwhile, the S&P 500 is roughly 2x - 2.5x as high as it was in 2012, going from the mid 1300's to the low 3,000's.

How is that not a bubble?

I know some people will tell me "share buybacks" justify the jump, but I don't buy that either. If Company X has 100 shares outstanding earning $10/share, it has $1,000 of earnings. If it buys back 50 of those shares, then it has 50 shares outstanding each earning $20/share. Still $1,000. Yes, each share is worth more, but with fewer shares outstanding, the market cap (total value of the company) should remain steady.

Next I'm sure I'll hear about helicopter money and how trillions of dollars have been printed. I get that. But ultimately if earnings aren't increasing, doesn't it just mean that each dollar printed is worth less? Wouldn't that imply that the better bet is to find a store of value, like a commodity, precious metal, etc. to keep our assets from devaluing?

Anyway, I welcome constructive feedback both from those who disagree with me and those who agree. I want to figure out if I have legitimate blind spots in my thought process.

 

[OldShooter]

Sadly, bubbles are only detectable in the rear view mirror.

Eugene Fama makes an interesting point about the "housing bubble." Within a few years housing prices were back to "bubble" levels, but that was not a bubble? Only the first time was a bubble?

Bubbles, schmubbles, ... Can you time the market? As they say, "Do you feel lucky, punk?" I don't. I just ride the waves.

 

[samclem]

I agree it probably is a bubble. The PE10 is 31.98 right now, the historical average is 16.7 (PE 10 chart).

It could pop today, or it could go on for years. One factor likely encouraging the increase in stock rices is the lack of other attractive investment alternatives. When bond rates are barely keeping up with inflation . . .

 

[Dtail]

I agree it probably is a bubble. The PE10 is 31.98 right now, the historical average is 16.7 (PE 10 chart).

It could pop today, or it could go on for years. One factor likely encouraging the increase in stock rices is the lack of other attractive investment alternatives. When bond rates are barely keeping up with inflation . . .

I agree with you on the alternative to bonds concept.
Not so much with the Cape 10. Yes it is very high from a historical basis, but if all followed investing heavily in equities only when Cape 10 for example was under 20, then we would have missed out on lots of gains since one brief moment in 2009.

 

[RenoJay]

One factor likely encouraging the increase in stock rices is the lack of other attractive investment alternatives. When bond rates are barely keeping up with inflation . . .

OK, the TINA argument makes sense to me on an emotional level, but not on a logical one. Historically, mean reversion has always created better entry points down the road when asset values have been too high by historic standards. So why invest in US stocks if you believe they’re over priced rather than simply sit on cash patiently, even if for a few years, waiting for a measurably more attractive entry point?

 

[bobandsherry]

Been reading about bubble theories since I retired 4 years ago. If I jumped every time I'd have missed out on some great returns.

No idea if/when it will happen, Only thing I am certain I have almost zero chance of timing it at the top or at the bottom. I'll lose on both sides. I rode the wave over the last 30+ years, and as Elton John sang, I'm still standing.

 

[samclem]

So why invest in US stocks if you believe they’re over priced rather than simply sit on cash patiently, even if for a few years, waiting for a measurably more attractive entry point?

It can be like this for a lot longer than a few years.
I don't think it makes sense to be all in or all out of stocks based on CAPE. What I do is vary my stock allocation within a window based on CAPE. CAPE/PE10 is a crummy, imprecise (timing and trigger points) tool for market timing, but it's not worthless (or, hasn't been historically). But to use it you have to be willing to be wrong for a long time.

 

[RobbieB]

It could pop today, or it could go on for years. One factor likely encouraging the increase in stock rices is the lack of other attractive investment alternatives. When bond rates are barely keeping up with inflation . . .

Yup. I have a lot of stocks because bonds suck right now. The dividends are beating the interest especially considering they get favorable tax treatment.

 

[audreyh1]

I agree it probably is a bubble. The PE10 is 31.98 right now, the historical average is 16.7 (PE 10 chart).

It could pop today, or it could go on for years. One factor likely encouraging the increase in stock rices is the lack of other attractive investment alternatives. When bond rates are barely keeping up with inflation . . .

I have been thinking about this index and current values, and shared some general thoughts and observations in another thread - https://www.early-retirement.org/forums/f28/cape10-observations-and-graphs-102072.html#post2366076.

It can be like this for a lot longer than a few years.
I don't think it makes sense to be all in or all out of stocks based on CAPE. What I do is vary my stock allocation within a window based on CAPE. CAPE/PE10 is a crummy, imprecise (timing and trigger points) tool for market timing, but it's not worthless (or, hasn't been historically). But to use it you have to be willing to be wrong for a long time.

Same here. I have been stuck at a 50/50 AA for several few years now based on the CAPE10 ratio persisting above 25, even with the Dec 2018 correction.

 

[samclem]

Yup. I have a lot of stocks because bonds suck right now. The dividends are beating the interest especially considering they get favorable tax treatment.

Dividends are a factor for me, too. But an investor needs to be realistic--when stock prices do eventually get back to historically "normal" levels, the haircut is going to wipe out a decade (or more) of the dividends we've received.

 

[VanWinkle]

I have been thinking about this index and current values, and shared some general thoughts and observations in another thread - https://www.early-retirement.org/forums/f28/cape10-observations-and-graphs-102072.html#post2366076.

I have been stuck at a 50/50 AA for quite a few years now based on the CAPE10 ratio persisting above 25.

I'm with you on this as I have been 50/50 since retirement. I will not change based on CAPE10 alone, but I am comfortable at 50/50 and the returns are more than I need to this point.

VW

 

[Jerry1]

I'm with you on this as I have been 50/50 since retirement. I will not change based on CAPE10 alone, but I am comfortable at 50/50 and the returns are more than I need to this point.

VW

I’m at 60/40 and it was a bit painful these past few years thinking about what could have been had I been 100% stocks. Yes, I believe this is a bubble, but I’m comfortable with my AA and will ride this out. Similar to the housing bubble. We stayed in our modest house and had some envy regarding some large fine houses our friends and colleagues bought. However, when the housing market tanked, some of my friends list those big houses and some even walked away from their mortgages being so far underwater. I didn’t take and glee in their loss, but me and DW we’re finally glad that we stuck with our plan and stayed in our modest house. During that time, we never once felt any risk at all about losing our house.

Similarly, if 60% gets cut in half, I’ll lose 30% of my portfolio. It will hurt, but it will be manageable. Along with the 60/40 (conservative) portfolio, there are also other income streams we have that should be okay and cushion the blow. Yes, it’s a bubble, but all you can do is hope for the best and prepare for the worst. That includes having a few years in cash (short term instruments) so I don’t have to react in any unthought out manner.

 

[bobandsherry]

I’m at 60/40 and it was a bit painful these past few years thinking about what could have been had I been 100% stocks. Yes, I believe this is a bubble, but I’m comfortable with my AA and will ride this out. Similar to the housing bubble. We stayed in our modest house and had some envy regarding some large fine houses our friends and colleagues bought. However, when the housing market tanked, some of my friends list those big houses and some even walked away from their mortgages being so far underwater. I didn’t take and glee in their loss, but me and DW we’re finally glad that we stuck with our plan and stayed in our modest house. During that time, we never once felt any risk at all about losing our house.



Similarly, if 60% gets cut in half, I’ll lose 30% of my portfolio. It will hurt, but it will be manageable. Along with the 60/40 (conservative) portfolio, there are also other income streams we have that should be okay and cushion the blow. Yes, it’s a bubble, but all you can do is hope for the best and prepare for the worst. That includes having a few years in cash (short term instruments) so I don’t have to react in any unthought out manner.

Honestly, bonds scare the hell out of me right now as rates are so low. Get them moving up to a more "normal" level and that 40% in bonds will feel the pain as well.

 

[eroscott]

I don't use these guys but they have a lot of great free and on-going videos. This one is related to the topic and is about a study done.

Is this bull market over? Study. 2,598 views • Feb 5, 2020
Jazz Wealth Managers 68.4K subscribers

 

[Dtail]

Honestly, bonds scare the hell out of me right now as rates are so low. Get them moving up to a more "normal" level and that 40% in bonds will feel the pain as well.

True.
That is why I have all of 40% bond allocation in CD's, Stable Value Fund.
Yeah rates not great either in CD's, but locked in some 3.30/3.05% 5 year returns with add on possibilities, so will worry about this portion in 2024.

 

[karen1972]

I just saw something on the stock run up on Tesla and it was associated with one of those investing platforms that now let you buy fractional shares so it allows for a very low entry bar ($1). Changes like that are certainly changing things plus the fact millennial are not buying houses so investing instead. I think the pool has gotten bigger and only so many places to put the money.

I've been doing a lot of long term tax planning, so as part of that I sold a good chunk this morning to help fill the cash reserves and increase my cost basis. I figure there is no downside to that based on my situation.

 

[VanWinkle]

Honestly, bonds scare the hell out of me right now as rates are so low. Get them moving up to a more "normal" level and that 40% in bonds will feel the pain as well.

Timing interest rates is no more successful than timing the stock market. You still have to be right twice. I have seen the way my bonds dampen volatility in my 50/50 portfolio. Intermediate bonds returned 10% last year, and may give it back next year. I am ok with that.

 

[foxfirev5]

Yeah, the huge majority of my FI is in a CD ladder. Now it's all on me. The avg coupon is running around 2.85% which I anticipate will drop in the future. Meanwhile I'm holding my nose and watching my rising equity glidepath grow a little faster than my plan. Perhaps it's time to stop reinvesting any dividends and let the cash pot grow a tad more. However I'm seeing not much need for additional cash.

Who knows what to do? I guess just stick to your plan and see what happens.

 

[Austin704]

I really enjoy Jonathan Clements’ perspectives on money and investing. He has a blog called Humble Dollar and last fall he wrote an article that contemplated the topic of overvalued stocks and how we should respond. Here’s a link:


https://humbledollar.com/2019/11/signal-failure/

 

[VanWinkle]

I really enjoy Jonathan Clements’ perspectives on money and investing. He has a blog called Humble Dollar and last fall he wrote an article that contemplated the topic of overvalued stocks and how we should respond. Here’s a link:


https://humbledollar.com/2019/11/signal-failure/

He is on of my favorite blogs to read also. Great stuff including his latest
book.

 

[Gumby]

I look at the Conference Board LEI and CEI to determine whether the economy might be heading into recession. It is starting to look that way. https://www.conference-board.org/pdf_free/press/US LEI - Press Release JANUARY 2020 (c).pdf

 

[Fermion]

I bought 50 march 2020 $325 puts today for $3.3

I just have a feeling that we have not quite seen the full extent of the wu-flu and things could pull back a tad over the next week or two as cases pop up in the USA.

I am not looking to make a fortune here, but even a 5% pullback would make those puts go from $16,500 to about $50,000.

 

[Spock]

My brain doesn't fit around the "yes its a bubble, but I'm staying in anyway" concept. Reminds me of megacorp when we'd have a mtg with senior execs telling them of the imminent problem on the tracks ahead only to be told "Roger! Bridge out! Full speed ahead!"

Maybe its a difference between fat FIREs and lean FIREs... I can't afford a 50% air pocket.
Maybe its FOMO or greed.
The winnings aren't yours until you take them off the table.

And its not just a stock market bubble. Its February and the Feds emergency repo market liquidity injections that were "just to cover YE2019 rollover" just pumped another 94.5B into repo markets earlier this week and today the offers for 30B available were overscribed by almost 2x, meaning they could have pumped another 27B.
The Fed is printing money to buy the debt issued by the Treasury to fund the deficit... 457B (thats half a trillion...) in just the last 4 months. This never worked for other countries.
Maybe it's working for the US because its the cleanest dirty shirt in the hamper. But nothing works forever.

 

[foxfirev5]

I really enjoy Jonathan Clements’ perspectives on money and investing. He has a blog called Humble Dollar and last fall he wrote an article that contemplated the topic of overvalued stocks and how we should respond. Here’s a link:


https://humbledollar.com/2019/11/signal-failure/

Good reasons why I tilt to dividend payers in my tIRA account.

 

[samclem]

"We're in a bubble."

We're not in a bubble"
"Bubble" implies a binary situation that probably isn't very useful, especially without the benefit of hindsight. But, present equity valuations are generally predictive of future equity returns--in a weak way.

My brain doesn't fit around the "yes its a bubble, but I'm staying in anyway" concept. Reminds me of megacorp when we'd have a mtg with senior execs telling them of the imminent problem on the tracks ahead only to be told "Roger! Bridge out! Full speed ahead!"

"Bridge out"is fairly black and white. In our case, we only know that the chance the bridge being down within the next mile is higher now than it usually is--but the road might be good for another 30 miles. And if we get off the road now, we have a choice between a muddy goat path and an alligator-infested canal.

But, if a person can't accept/accommodate a fairly severe drop in the value of stocks, then it makes good sense to allocate very little to them.