How is this NOT a US Stock bubble??

[bobandsherry]

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.

Maybe I'm wrong, but I consider CD and SVF to be part of cash (fixed income) than bond. I consider debt instruments of corporation, municipalities and government agencies to be bond.

 

[OldShooter]

I really don't worry about "losing xx% of my money" following a bubble or other market gyration. I've been seeing these gyrations since 1987 and I have never lost any money. For a time, the market value of my holdings has been reduced but it has always come back.

And, really, if you believe prices are at bubble levels you are saying that they are unrealistic. So if they are unrealistic, why would you measure your paper losses from an unrealistic peak? Measure instead from some kind of trend line. The market was above trend, now maybe it's below trend, and history says it will revert.

Handle SORR with a sensible asset allocation, sit back and relax. Follow Jack Bogle's market advice: "Don't do something; just stand there."

 

[bobandsherry]

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/

If you look, he's contemplated the topic of overvalued stocks for quite a while. You know, eventually he'll be right. And then that will be the moment he claims victory.

 

[VanWinkle]

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

"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."

 

[VanWinkle]

If you look, he's contemplated the topic of overvalued stocks for quite a while. You know, eventually he'll be right. And then that will be the moment he claims victory.

Per the article, "So what is true? As always, we should fret less about the markets and focus more on the things we can control. Those things are fivefold: risk, investment costs, taxes, our emotional reaction to market turmoil, and our savings rate if we’re still in the workforce and our spending rate if we’re retired. Diligently focusing on all five? If you are, it likely doesn’t matter whether stocks today are overvalued or not."

I don't think he is the forecasting type.

 

[Dtail]

Maybe I'm wrong, but I consider CD and SVF to be part of cash (fixed income) than bond. I consider debt instruments of corporation, municipalities and government agencies to be bond.

Well my SVF is netting 3.50% and CD's are an effective 3.20%.
With any rise in interest rates in this year, will the Bond returns be that high?
I understand you mean conceptually, but I am looking at it from a yield perspective.
If one stated that they had 40% in "cash", there would be all sorts of too conservative type comments.

 

[Gumby]

"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."

True enough, the market could lead the real economy or vice versa. So, yes, if I sold all my stock when the CEI confirmed a downturn in the LEI, I could miss out on some gains if the market lags the real economy. Conversely, I could take some losses if the market turns down first and I wait for the LEI/CEI to confirm a recession is nigh.

But there is usually some correlation between recessions and bear markets within a period of time that is not precisely known but generally fairly narrow, so it makes me tread more carefully.

 

[HI Bill]

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.

+1. And for all those who think we're in a bubble, and think bonds will save them...what about the concerns here over the debt? My long-term fear, is the eventual impact on the economy (equities, bonds, cash), when debt servicing becomes impossible....

 

[bobandsherry]

Well my SVF is netting 3.50% and CD's are an effective 3.20%.
With any rise in interest rates in this year, will the Bond returns be that high?
I understand you mean conceptually, but I am looking at it from a yield perspective.
If one stated that they had 40% in "cash", there would be all sorts of too conservative type comments.

I get your point, but to say CD's are bonds, well they really aren't. Bonds re-act differently that fixed income CD's. In a decreasing rate environment Bonds would show appreciation in their underlying value, CD's don't. But as we also know the inverse then is also true. Additionally, Bonds have other risks that CD's don't; credit and liquidity. So overall Bonds should have a higher return to reflect these risks.

I get your point with comments being too conservative - in this environment I'd rather be invested in "cash" (interest earning) than bonds. Unless rates go negative there is only so much downside in rates, but a whole lot of upside risk. But seems strange just to appease a "conservative" group as you really aren't following their "conservative" approach.

 

[BossNoMore]

Well my SVF is netting 3.50% and CD's are an effective 3.20%.
With any rise in interest rates in this year, will the Bond returns be that high?
I understand you mean conceptually, but I am looking at it from a yield perspective.
If one stated that they had 40% in "cash", there would be all sorts of too conservative type comments.

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

 

[pb4uski]

You mean that this makes you nervous?

 

[pb4uski]

... If you have enough money you can be conservative

And the inverse is true as well.

 

[pb4uski]

I get your point, but to say CD's are bonds, well they really aren't. Bonds re-act differently that fixed income CD's. In a decreasing rate environment Bonds would show appreciation in their underlying value, CD's don't. But as we also know the inverse then is also true. Additionally, Bonds have other risks that CD's don't; credit and liquidity. So overall Bonds should have a higher return to reflect these risks. ...

I would say that some bonds and CDs are close enough to be functional equivalents.

Bonds and CDs have many similarities, especially brokered CDs and US Treasuries of similar term. Both have interest rate risk and prices move inversely to interest rates. Both are full faith and credit.... risk-free. Both pay interest periodically and principal at maturity. More similar than different IMO.

Bank CD's take interest rate risk away (both positive and negative). And then on the bond side you can stray into as little or as much credit risk as you desire.

 

[pb4uski]

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.

That is part of the reason why I prefer credit union CDs at this point. In 2019 when you could snag 3.0% and 3.5% 5-year CDs.... that was good enough to entice someone who had previously only owned one CD in his life* to dive into the pool head first.

But when interest rates are declining it is painful to see bond funds like Total Bond provide a superior return.

* PenFed 3.0% 5-year that matured in Dec 2018

 

[bobandsherry]

I would say that some bonds and CDs are close enough to be functional equivalents.

Bonds and CDs have many similarities, especially brokered CDs and US Treasuries of similar term. Both have interest rate risk and prices move inversely to interest rates. Both are full faith and credit.... risk-free. Both pay interest periodically and principal at maturity. More similar than different IMO.

Bank CD's take interest rate risk away (both positive and negative). And then on the bond side you can stray into as little or as much credit risk as you desire.

IMHO, there's more differences than similarities....

Key Risk Differences of CD to Bonds:

• Credit Risk - CD none
• Liquidity Risk - bond prices may go down, so haircut taken if need to get money out
• Concentration Risk - Not applicable to CD
• Market/Interest Rate Risk - Bond values fluctuate, CD doesn't

One just sleeps better with a CD than they would with a Bond, so that's enough difference for me.

 

[Austin704]

If you look, he's contemplated the topic of overvalued stocks for quite a while. You know, eventually he'll be right. And then that will be the moment he claims victory.

Did you actually read the article? I don’t believe he’s arguing they are or are not overvalued. He concludes by saying:


“As always, we should fret less about the markets and focus more on the things we can control. Those things are fivefold: risk, investment costs, taxes, our emotional reaction to market turmoil, and our savings rate if we’re still in the workforce and our spending rate if we’re retired. Diligently focusing on all five? If you are, it likely doesn’t matter whether stocks today are overvalued or not.”

 

[pb4uski]

IMHO, there's more differences than similarities....

Key Risk Differences of CD to Bonds:

• Credit Risk - CD none
• Liquidity Risk - bond prices may go down, so haircut taken if need to get money out
• Concentration Risk - Not applicable to CD
• Market/Interest Rate Risk - Bond values fluctuate, CD doesn't

One just sleeps better with a CD than they would with a Bond, so that's enough difference for me.

Did you even read my post before responding?

Tell me about the differences between a brokered CD with a Treasury bond as suggested in my post... let's say a 5 year brokered CD and a 5 year Treasury bond, both issued in January 2020.

 

[bobandsherry]

Did you even read my post before responding?

Tell me about the differences between a brokered CD with a Treasury bond as suggested in my post... let's say a 5 year brokered CD and a 5 year Treasury bond, both issued in January 2020.

Yes, I read it. But you want to set that the only bond is Treasury issue. But even with that narrow definition, there is a key difference. Treasury values will rise or fall based on change in interest rates. So key difference is if rates go up then Treasury would decrease in value before maturity. If someone needed to sell before maturity they would lose principal value by redeeming early.

But, bonds are more than just Treasury issues. One could invest in corporate and Muni bonds, getting a better coupon rate but then incurring the other risks that I had already mentioned.

 

[Jerry1]

. . . there is a key difference. Treasury values will rise or fall based on change in interest rates. So key difference is if rates go up then Treasury would decrease in value before maturity. If someone needed to sell before maturity they would lose principal value by redeeming early.

How is that different from a CD? A brokered CD would be sold if you need the cash before maturity and you would incur interest rate risk. I guess there are some CDs that you can just redeem (for example, those bought directly from a credit union), but most would incur a penalty. And, pb4uski did specifically state that the comparison is with brokered products. In that space, they act the same.

 

[audreyh1]

Can we stop on this CD versus treasury minutiae and get back to the bubble?

 

[pb4uski]

How is that different from a CD? A brokered CD would be sold if you need the cash before maturity and you would incur interest rate risk. I guess there are some CDs that you can just redeem (for example, those bought directly from a credit union), but most would incur a penalty. And, pb4uski did specifically state that the comparison is with brokered products. In that space, they act the same.

^^^ Thank you... at least someone gets it.

... But, bonds are more than just Treasury issues. One could invest in corporate and Muni bonds, getting a better coupon rate but then incurring the other risks that I had already mentioned.

Of course they are more than just Treasuries... from Treasuries one can add credit risk in exchange for better return and drift into munis and corporates. I conceded that in a prior post.

I would say that some bonds and CDs are close enough to be functional equivalents.

Bonds and CDs have many similarities, especially brokered CDs and US Treasuries of similar term. Both have interest rate risk and prices move inversely to interest rates. Both are full faith and credit.... risk-free. Both pay interest periodically and principal at maturity. More similar than different IMO.

Bank CD's take interest rate risk away (both positive and negative). And then on the bond side you can stray into as little or as much credit risk as you desire.

 

[RenoJay]

Can we stop on this CD versus treasury minutiae and get back to the bubble?

Thank you. I'm the OP. From what I've read of responses, people seem to feel:

1. Bonds are no better, and likely worse, so stocks look good by comparison especially when comparing the dividend yield to treasury coupons.
2. That timing is a fool's errand because you need to get it right twice with the sell and with the buy.

My thoughts:

I never suggested that bonds were any great bargain. There's also the option of sitting on boring cash (and yes CDs or FDIC insurance online savings accounts are a reasonable option IMO) and patiently waiting for a better entry point.

Furthermore, regarding the timing, if you look at past bubbles, there were many opportunities to exit and re-enter later that, while not exactly nailing the peak upon exit, nor catching the exact low upon re-entry, still yielded better results with significantly less volatility than simply holding. (For instance, you could have exited the market in 1998, about two years after Greenspan's irrational exuberance comments, missed the incredible gains that followed in 1999 and early 2000, and re-entered anytime between 2002 - 2003 and done better than simply holding the whole time, while earning interest during the out-of-the-market period. Similar story for the up and down around the Great Financial Crisis.) Point is: It's like horse shoes; close enough is good enough.

SO....does anyone disagree with my original thesis that aggregate profits have been flat for 7+ years, and interest rates are no lower now than then, and therefore the 2x+ jump in stock prices is unjustified? Does someone have an argument disproving the data points, or a point of view that I'm totally missing regarding overvaluation?

 

[BeachOrCity]

I get your point, but to say CD's are bonds, well they really aren't. Bonds re-act differently that fixed income CD's. In a decreasing rate environment Bonds would show appreciation in their underlying value, CD's don't. But as we also know the inverse then is also true. Additionally, Bonds have other risks that CD's don't; credit and liquidity. So overall Bonds should have a higher return to reflect these risks.



I get your point with comments being too conservative - in this environment I'd rather be invested in "cash" (interest earning) than bonds. Unless rates go negative there is only so much downside in rates, but a whole lot of upside risk. But seems strange just to appease a "conservative" group as you really aren't following their "conservative" approach.

I am with @dtail on this. While bonds can have a good year in a declining interest rate environment, that side of things is simply speculation. It’s the underlying yield that matters. And recently it has been SVFs and CDs that have provided the better yield than equivalent duration and risk bond instruments.

The CDs have no speculative up or downside due to rates changing and I am fine with that.

I think some people may just have an aversion to “cash” thinking it doesn’t have yields needed for success, but that is relying on older definitions and scenarios where bonds had superior yield for equivalent duration and risk. Bonds don’t have that today.

 

[BeachOrCity]

To the OPs point. I think earnings have grown. Look at the S&P 500

 

[Dtail]

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

Nothing wrong with that.
There are at least 2 frequent posters here who have no equity allocation.
Some folks who have already won the game also go the opposite way.

I see you also live in Tampa. Why not come to our SW FLA get together a week from Sunday and we can discuss further and have a few drinks?