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Valuation Metrics
Old 02-26-2021, 11:00 AM   #1
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Valuation Metrics

Honestly, it's been years since I paid much attention to valuation metrics, but it seems like a good time to take a peek at a few.

Got any favorites?

Everybody loves Tobin's Q, right? Just checked, and it's indicating the market is a bit overvalued. OK, way overvalued. The most overvalued ever.

What do I do with this info? Nothing actionable. I use it to set expectations of magnitude of a correction if/when we get one.

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Old 02-26-2021, 11:08 AM   #2
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Buffett's favorite is apparently market cap to GDP:

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Old 02-26-2021, 11:10 AM   #3
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Hussman basically capitulated a couple years ago, I think. But here's his latest on expected returns.

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Old 02-26-2021, 11:18 AM   #4
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Shiller PE10 is actually not quite as bad.

https://www.multpl.com/shiller-pe
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Old 03-01-2021, 05:14 PM   #5
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Price:Sales ratio is closing in on twice what it was at the dot-com bubble peak.

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Old 03-01-2021, 06:14 PM   #6
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Shiller PE10 is actually not quite as bad.

https://www.multpl.com/shiller-pe
Shiller within his Excel spreadsheet data posts another measure of valuation nowadays. This includes the current 10 year Treasury rate. Here is the chart he has included:




I think this just compares the inverted value of the PE10 (CAPE) to the current 10 year Treasury rate. So if the PE10=30 this means 3.33% compared to a 10 year Treasury of around 1.5% right today corrected by the 10 year earnings. Or some such formula. Perhaps Shiller is hedging a bit to account for the extremely low rates?

Anyway according to this we are not at extremes like in 1929 or 1970 or 2000. The extremes are where I would get concerned.
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Old 03-01-2021, 06:17 PM   #7
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If you look at history, valuations are not such great indicators of where stocks are headed. If it were only that easy!
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Old 03-01-2021, 06:20 PM   #8
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That Shiller metric is good to see. I think everybody is adjusting their models after being so wrong for so long. I see Shiller now calls this "rational exuberance."

Shiller likes international a lot more than US stocks. Me too.

The ECY is close to its highs across all regions and is at all-time highs for both the UK and Japan. The ECY for the UK is almost 10%, and around 6% for Europe and Japan. Our data for China do not go back as far, though China’s ECY is somewhat elevated, at about 5%. This indicates that, worldwide, equities are highly attractive relative to bonds right now.
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Old 03-01-2021, 06:24 PM   #9
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According to this, we are in a recession and don't even know it:

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Old 03-01-2021, 06:32 PM   #10
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That Shiller metric is good to see. I think everybody is adjusting their models after being so wrong for so long. I see Shiller now calls this "rational exuberance."

Shiller likes international a lot more than US stocks. Me too.

The ECY is close to its highs across all regions and is at all-time highs for both the UK and Japan. The ECY for the UK is almost 10%, and around 6% for Europe and Japan. Our data for China do not go back as far, though China’s ECY is somewhat elevated, at about 5%. This indicates that, worldwide, equities are highly attractive relative to bonds right now.
If one looks at small and midcap value stocks in the US I think the argument for international valuations is less compelling. Currently my small/midcap US stocks are beating international small stocks. But they both have been doing great especially in February so no complaints on diversifying a bit.

Both small/midcap value and international small have been out of favor as the SP500 (really the large cap growth) has been the star performer in recent years. But I am hoping this story is changing and will be generally recognized in the months to come.
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Old 03-01-2021, 06:44 PM   #11
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That's a good point. Shiller's looking at the S&P500, and those cap-weighted holdings really exaggerate the valuation craziness. (TSLA!!1!!)
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Old 03-02-2021, 05:48 AM   #12
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When I capture month-end account values, I also fill in a column with Shiller PE10 and S&P500 data.

I thought everyone was aware of the on-going recession? The FRED Blog covers interesting data at times, and shows one how to build the graph. Here's an example:
https://fredblog.stlouisfed.org/2019...t-the-economy/
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Old 03-02-2021, 09:51 AM   #13
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Here's an obscure metric: ratio of NASDAQ to NYSE volume. Not an indicator of valuation as much as tech exuberance.

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Old 03-02-2021, 10:03 AM   #14
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When I capture month-end account values, I also fill in a column with Shiller PE10 and S&P500 data.

I thought everyone was aware of the on-going recession? The FRED Blog covers interesting data at times, and shows one how to build the graph. Here's an example:
https://fredblog.stlouisfed.org/2019...t-the-economy/
I didn’t realize FRED had a blog! Cool!
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Old 03-04-2021, 12:02 AM   #15
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If you look at history, valuations are not such great indicators of where stocks are headed. If it were only that easy!
The chart in the post just before yours seems to be a "good" (if not "great") indicator.

Other valuation metrics are reviewed in this article from Mauldin Economics (see the list of metrics credited to Doug Kass):

https://www.mauldineconomics.com/fro...e-stock-market

There's some interesting commentary, but I don't agree with all of the article's conclusions (like their opinion against 60/40 indexed portfolios).

The article also quotes Jeremy Grantham, who often has interesting things to say (even if he's criticized as being a perma-bear). Grantham once wrote that there was a shift in the equity market around 1995 or so (you can see evidence of that in the various valuation charts in this thread). My guess is that the mid-90s was around the time large market participants became convinced of the "Greenspan put" (which continues to be alive and well today, apparently), and therefore became willing to accept higher valuations than previously.

Personally, I like price-to-book and price-to-sales ratios as valuation metrics (available on multpl.com), but one has to keep in mind the mid-90s valuation shift.

Considering all of the above, I'm somewhat underweight equities at the moment.
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Old 03-05-2021, 05:17 AM   #16
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I didn’t realize FRED had a blog! Cool!
I use the RSS feed and get a perfect copy in my email reader once or twice a week. It really is a great blog, much different than the usual tripe.

I think it may have been one of your posts in a discussion about which economic indicators to follow that led me to FRED.
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Old 03-05-2021, 07:14 AM   #17
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The chart in the post just before yours seems to be a "good" (if not "great") indicator.

Other valuation metrics are reviewed in this article from Mauldin Economics (see the list of metrics credited to Doug Kass):

https://www.mauldineconomics.com/fro...e-stock-market

There's some interesting commentary, but I don't agree with all of the article's conclusions (like their opinion against 60/40 indexed portfolios).

The article also quotes Jeremy Grantham, who often has interesting things to say (even if he's criticized as being a perma-bear). Grantham once wrote that there was a shift in the equity market around 1995 or so (you can see evidence of that in the various valuation charts in this thread). My guess is that the mid-90s was around the time large market participants became convinced of the "Greenspan put" (which continues to be alive and well today, apparently), and therefore became willing to accept higher valuations than previously.

Personally, I like price-to-book and price-to-sales ratios as valuation metrics (available on multpl.com), but one has to keep in mind the mid-90s valuation shift.

Considering all of the above, I'm somewhat underweight equities at the moment.

Couple things....


Anyone who has taken Granthams views and applied that to their investment mix has done extremely poor in the markets. Permabears always sound good, but following their advice can be financial suicide.


Shiller himself has even stated that his CAPE theory should not be used to time the market.


Interesting you brought up price to sales. The "inventor" of that metric is Ken Fisher who is the sources below.



Here are a couple things worth viewing and reading.



https://www.cnbc.com/video/2017/10/2...en-fisher.html


https://www.realclearmarkets.com/art...ns_495670.html
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Old 03-05-2021, 09:10 AM   #18
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Valuations matter if you're investing.

They don't matter if you're speculating.

Apparently Ken Fisher thinks euphoria matters. What does euphoria look like? See the ratio of NASDAQ to NYSE volume above.
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Old 03-05-2021, 09:33 AM   #19
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Valuations matter if you're investing.

They don't matter if you're speculating.

Apparently Ken Fisher thinks euphoria matters. What does euphoria look like? See the ratio of NASDAQ to NYSE volume above.

Heavy volume of one index over the other does not constitute "euphoria".


Valuations are one measure I think is his point. Not the end all as some are led to believe. It's not that simple. The 1 , 3 and 5 year returns show that.




Take 2009. The S&P 500’s trailing 12-month P/E soared to levels unseen since the dot-com crash, thanks to putrid late-2008/early-2009 profits dragging down the P/E’s denominator more than prices fell. Yet that formed the beginning of history’s longest bull market—a generational buying opportunity.
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Old 03-05-2021, 09:47 AM   #20
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Oh, no question about it, "E" is volatile. A lot of the metrics in this thread take that into consideration.

What's the euphoria metric? Kids yelling "gamestonk!" seems pretty good to me.
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