How is this NOT a US Stock bubble??

[SnowBound]

40% , I’m at about 90% cd’s , fixed annuities and muni bonds. Avg ret now is about 3.2%. I may be tooooo conservative . I sleep well. If you have enough money you can be conservative

Hey welcome here! If you sleep well at night great. If you want a second opinion, you can get at least three here.

 

[Lakewood90712]

Of course it is a bubble. Has a ways more to go before it gets a hole. Ride it, but keep an eye on it.

 

[audreyh1]

Of course it is a bubble. Has a ways more to go before it gets a hole. Ride it, but keep an eye on it.

Pretty much all I know to do - rebalance on the way up, rebalance on the way down......

 

[tulak]

For those that adjust their equity allocation based on CAPE, how do you take into consideration international equities?

I’m wondering if you exclude reallocating in/out of international equities or if you adjust your entire equity allocation?

 

[audreyh1]

I don’t have a really large exposure to international, about 20% of equities, and I simply adjust my entire equity allocation. Keeping it simple.

 

[tulak]

Makes sense. Thanks Audrey.

 

[Montecfo]

"A recession can’t be declared until it’s already been going on for at least six months because it is, by definition, at least two consecutive quarters of economic decline. It’s possible that the economy could be in a recession before a market downturn occurs, or could slip into one after, but nobody really knows until after the fact."

Yes. And a recession does not necessarily dictate stock market action.

 

[samclem]

For those that adjust their equity allocation based on CAPE, how do you take into consideration international equities?

I’m wondering if you exclude reallocating in/out of international equities or if you adjust your entire equity allocation?

I'm no expert, but I don't break out foreign equities. If my US equities are at high valuation, I pare back all my equities, including my non-US holdings.
My reasoning (and I'll admit I didn't put a lot of study into this).
1) The idea of applying a CAPE-like assessment to each foreign market is too much work and, based on vagaries of national accounting practices and limitations on historical data, of limited value.
2) It seems likely to me that a big selloff in US equities is fairly likely to be accompanied by similar moves abroad.
3) I just don't hold much international equity anyway
4) I'm only tweaking my equity allocation, not jumping entirely in and out

IMO, valuations are not directly comparable across nations. If US equities are priced at a PE10 of 32 and Greek equities are at 25, I'm not ready to conclude that I should sell my US stocks to buy Greek ones.

 

[Dtail]

I'm no expert, but I don't break out foreign equities. If my US equities are at high valuation, I pare back all my equities, including my non-US holdings.
My reasoning (and I'll admit I didn't put a lot of study into this).
1) The idea of applying a CAPE-like assessment to each foreign market is too much work and, based on vagaries of national accounting practices and limitations on historical data, of limited value.
2) It seems likely to me that a big selloff in US equities is fairly likely to be accompanied by similar moves abroad.
3) I just don't hold much international equity anyway
4) I'm only tweaking my equity allocation, not jumping entirely in and out

IMO, valuations are not directly comparable across nations. If US equities are priced at a PE10 of 32 and Greek equities are at 25, I'm not ready to conclude that I should sell my US stocks to buy Greek ones.

Bolded by me - If point #2 is correct, then how does one reconcile the belief in the Cape 10 concept being that the Int'l Cape 10 is currently much lower than the USA Cape 10, but still would suffer similar type losses?
So when does Int'l operate independently?

 

[pj.mask]

Well my stocks have doubled since 2014 so I have made up for a 50% drop?

I’m reading this thread and CDs are ‘painful’, bonds are ‘risky’ and neither is paying much more than inflation.

So if someone wanted to ratchet down their equity position, where should that money go?

I’m asking because I’ve been trying to get to 90:10 but the 90% keeps growing and the 10% looks unappealing.

 

[brewer12345]

I see a lot of parallels between the market action today and in both the run up to the dotcom crash and the financial crisis. There is a panic to buy regardless of price and the rally is heavily concentrated in relatively few sectors/names. The economic backdrop contains material risk that the FOMO buyers of equity seem to be ignoring. There is a novel risk (pandemic) that is hard to estimate the potential impact of, but equity markets don't care. This all makes me nervous.

Crank up those equity allocations if you choose, but make sure you really are prepared for a significant downdraft.

 

[pb4uski]

+1 sometimes the objective is not to win.... but rather.... the objective is to NOT lose.

And like many things in life everything in moderation and nothing in excess.

 

[samclem]

Bolded by me - If point #2 is correct, then how does one reconcile the belief in the Cape 10 concept being that the Int'l Cape 10 is currently much lower than the USA Cape 10, but still would suffer similar type losses?
So when does Int'l operate independently?

I can't check the correlation between US and foreign equities right now, but IIRC, they are more highly correlated in recent decades than in the past.

I'm not surprised that intl CAPE10 is lower than the US CAPE10. This could be the market's way of reflecting perceived relative risk. Also, with some equities (as with many intl govt bonds), the prices reflect factors that are not truly reflective of what they'd be in an ideal open market. So, I'd have to study each market hard (harder than it is worth, to me) to make comparisons.

 

[USGrant1962]

Bolded by me - If point #2 is correct, then how does one reconcile the belief in the Cape 10 concept being that the Int'l Cape 10 is currently much lower than the USA Cape 10, but still would suffer similar type losses?
So when does Int'l operate independently?

I think the answer is that few argue that CAPE10 predicts short-term bear markets. And if they do they are clearly wrong because CAPE10 has been well above "average" for a LONG time. Rather, it is correlated with total returns over the next 10 years. IMO, it is pretty clear that it is a terrible market timing tool, but it may be a useful input when deciding asset allocation.

Having said that, I was intrigued by CAPE10 years ago but have fallen out of love with it mostly because it does not account for changes in accounting rules, dividend policies, buyback changes, tax policies, and most importantly interest rates. And I never really got my head around how earnings from 8, 9, and 10 years ago have anything to do with returns over then next 5 or 10 years.

I haven't done the math, but from my reading I think something like 1/CAPE7 minus 10-year Treasury yield might be a better metric for stock valuation. That is smoothed earnings yield minus treasury yield. I think it was Kitces who demonstrated that CAPE7 has the best correlation with future equity performance. It is on my to do list to take Shiller's data and apply this theory.

 

[BeachOrCity]

I could not find a copy of it, but Bob Lefsetz wrote an opinion piece last year on how “nothing matters anymore” and cited a bunch of examples of companies or markets that should have gone down based on publicly available facts but have not gone down in an appreciable way.

When this type of thing keeps happening it is a classic sign of a bubble.

So yes, I do think we are in an asset bubble (and that is all assets not just equities).

The old question is what to do about it?

 

[BeachOrCity]

+1 sometimes the objective is not to win.... but rather.... the objective is to NOT lose.

And like many things in life everything in moderation and nothing in excess.

Good point!

I would add that this is especially true for people at or near retirement age, but much less true for someone early or young in their career.

 

[bobandsherry]

Well my stocks have doubled since 2014 so I have made up for a 50% drop?

I’m reading this thread and CDs are ‘painful’, bonds are ‘risky’ and neither is paying much more than inflation.

So if someone wanted to ratchet down their equity position, where should that money go?

I’m asking because I’ve been trying to get to 90:10 but the 90% keeps growing and the 10% looks unappealing.

Interesting to read your comment. I had wondered the same thing on where to put money. I also wondered how I've done in the past 10 years with being mostly in equities. From a current value, a 100% equity is 22% better than 70/30.

My initial thought was over the 10 years I'd be in a position to weather a significant down turn. And well, maybe something's flawed, but as I looked at the details someone who was largely equities, after a 50% drop (significant) in equity values, would still have a portfolio that's 6.7% higher than someone who had 70/30 split. This analysis ignores what Bond value would do if equities saw a 50% drop as it would be a guess at best.

I've used VTSAX and VBTLX as basis to measure the relative growth.



Here's my source for valuations over the 10 year period:

 

[audreyh1]

Well my stocks have doubled since 2014 so I have made up for a 50% drop?

I’m reading this thread and CDs are ‘painful’, bonds are ‘risky’ and neither is paying much more than inflation.

So if someone wanted to ratchet down their equity position, where should that money go?

I’m asking because I’ve been trying to get to 90:10 but the 90% keeps growing and the 10% looks unappealing.

I simply don’t worry about CDs and bonds. Risk is relative. I diversify my “bets” and rebalance. I don’t worry about fixed income performance, it’s there to diversify against stocks.

 

[audreyh1]

I see a lot of parallels between the market action today and in both the run up to the dotcom crash and the financial crisis. There is a panic to buy regardless of price and the rally is heavily concentrated in relatively few sectors/names. The economic backdrop contains material risk that the FOMO buyers of equity seem to be ignoring. There is a novel risk (pandemic) that is hard to estimate the potential impact of, but equity markets don't care. This all makes me nervous.

Crank up those equity allocations if you choose, but make sure you really are prepared for a significant downdraft.

Agreed. Panic to buy. Until it’s finally panic to sell.

 

[Lakewood90712]

A retired fellow once used this phrase " Irrational exuberancec "

 

[Gumby]

A retired fellow once used this phrase " Irrational exuberancec "

He said that on December 5, 1996. The market peaked over three years later, on March 10, 2000. Irrationality can last a long time.

 

[Fermion]

We have a couple of companies now worth something like $1.4 trillion each.

I don't know why we even keep track of billions anymore in the budget

 

[RobLJ]

Bubble?

When stocks go up 5%, since 2018, I've been scraping off half of gains and reallocating into bonds and cash.
I put some of the cash back into stock in Jan 2019 since I thought the fall mini-crash was excessive--then I scraped off a bunch of the gains in August 2019 and Jan 2020.

I don't mind stashing a bunch in cash at 2% (or 1.75% now) to be ready to reinvest in stock after a correction or during a bear, and to fund the next 2 years of withdrawals. I still have 4 years to go before drawing SS and the part-time online gig is probably done in September, so the next 2 years are the only period I worry about. I was a lot more worried 5 years ago when I went part-time.

 

[John0019]

He said that on December 5, 1996. The market peaked over three years later, on March 10, 2000. Irrationality can last a long time.

+1

As a side note I'm kind of tired of hearing in general that we are in an 11 year bull market run. If we go into a "bear" market in the not to distance future don't believe it is because this bull market is a little long in the tooth, late innings, etc.

IMHO current bull market is a little over 1+ years old (I count late 2018 as a bear). And it can be argued that we have had a couple of others since the great financial crisis.

 

[audreyh1]

+1

As a side note I'm kind of tired of hearing in general that we are in an 11 year bull market run. If we go into a "bear" market in the not to distance future don't believe it is because this bull market is a little long in the tooth, late innings, etc.

IMHO current bull market is a little over 1+ years old (I count late 2018 as a bear). And it can be argued that we have had a couple of others since the great financial crisis.

Late 2018 didn't quite make the 20% mark, and more importantly, it didn't stay down there for at least 2 months. So that wasn't a bear market. It was a correction.

What Is a Bear Market? ... Typically, bear markets are associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time - typically two months or more.Jun 11, 2019

https://www.investopedia.com/terms/b/bearmarket.asp