So much bullish sentiment

[enjoyinglife102]

I don't disagree with the Japan thought, but what is your evidence of a "bubble"?

I also agree with your statement regarding return of capital. In fact regularly I seriously consider reducing my allocation to equity sharply. But not because I think we are in a bubble.

I don't know of any valuation metric that says we are not in a bubble or at the very least extremely expensive. No one can time anything so I just periodically rebalance my conservative portfolio knowing I can adapt to a worse case scenario and live a good life.

 

[corn18]

I don't know of any valuation metric that says we are not in a bubble or at the very least extremely expensive. No one can time anything so I just periodically rebalance my conservative portfolio knowing I can adapt to a worse case scenario and live a good life.

We are getting pretty heady, aren't we?

 

[street]

It does intrigue me that the success rate goes up in firecalc the more conservative I get. 20/80 is 100% while 60/40 is 99%. But I can't resist getting some return for my heirs. I could go to a liability matching portfolio, but that seems overkill to me. I need $1.1M in today's dollars to fund all of my budget minus travel/blow that dough. I will have $800k in bonds when I retire (actually it's all in a stable value fund in my 401k yielding 2.1%). I figure that's close enough to safe with some upside for the kids.

Why is that??

 

[HI Bill]

Why is that??

I believe it is because historically, equities have outperformed bonds in the US. So while an 80/20 portfolio might have more volatility over the long run, it should outperform a 60/40, based on historical data. SORR is the major concern. Along with how long we can kick the national debt and deficit down the road.

 

[Focus]

I sense a general bullishness as well. I thought we were overdue for a major correction when the pandemic hit. It's possible the pandemic has thrown the cycle out of whack and the post-pandemic rebound might keep the party rolling. Who knows? We're in a unique situation.

I do worry more about inflation, because I think the Fed is playing with fire and should have taken a more measured approach.

I used to be 60/40, but I've been 50/50 for a while. That's had an interesting effect psychologically. It makes me much less likely to try any moves.

 

[NYEXPAT]

I am expecting rising-yield deflation over the next 2 or 3 years!

 

[audreyh1]

Give it time. I think you will be proven right after the propping up has run its course.

The propping up could last a year, or two.

S&P 500 earning are still way below a year ago. Global economies are still way down. It will take a while to recover, but markets have already anticipated it and then some.

 

[NW-Bound]

Stocks are priced by people who count their chicken before the eggs hatch.

 

[audreyh1]

Stocks are priced by people who count their chicken before the eggs hatch.

Certainly during the upswing!

 

[NW-Bound]

Certainly during the upswing!

More than that. They expect twins and triplets out of them eggs.

 

[USGrant1962]

I don't know of any valuation metric that says we are not in a bubble or at the very least extremely expensive. No one can time anything so I just periodically rebalance my conservative portfolio knowing I can adapt to a worse case scenario and live a good life.

Here's one. The zero interest rate environment has made earnings yield the only game in town. Earnings yield versus the ten-year treasury yield says the only place to put money is stocks. Especially considering inflation and ignoring non-productive commodity speculation.

https://www.yardeni.com/pub/valuationfed.pdf

I'm not arguing that the Fed Model is correct, but it is at least as believable as CAPE. Regarding CAPE, why do earnings 8, 9, 10 years ago have anything to do with expected returns today? They don't, but current interest rates do. But if there is a risk premium, equities will still beat the alternatives.

Oh, and people have been saying interest rates have to go up for a decade...

FWIW I'm staying conservative. IMO, the Fed Model is about relative returns and locking in negative real yield (bonds) is a non-starter, so bailing on equities is a non-starter for me.

 

[chassis]

We are getting pretty heady, aren't we?

@corn18

What is your take on the interest rate trend, compared with the p/e chart that you posted?

Interest rates 20 years ago were about 400% higher than they are today. What effect does that have on asset prices?

 

[Montecfo]

I don't know of any valuation metric that says we are not in a bubble or at the very least extremely expensive. No one can time anything so I just periodically rebalance my conservative portfolio knowing I can adapt to a worse case scenario and live a good life.

Ok. I think from your response you simply view stocks as "expensive". It's a very different statement than saying we are in a bubble..

In a bubble stocks have lost their connection to any rational basis for their valuation. One could argue rather effectively I think that Tesla is at such a valuation, but we are not at that point on equities generally.

But I do not think you mean bubble in that way. If you did you would probably be selling all of your stocks, not simply rebalancing.

 

[Montecfo]

USGrant I think has it largely correct. You cannot make sense of stock values while ignoring interest rates. They are the most critical single metric driving equity valuations and they are at historic lows.

 

[street]

I believe it is because historically, equities have outperformed bonds in the US. So while an 80/20 portfolio might have more volatility over the long run, it should outperform a 60/40, based on historical data. SORR is the major concern. Along with how long we can kick the national debt and deficit down the road.

Thanks for explaining that for me.

 

[cyber888]

My assessment is that sentiment is neither bullish nor bearish at the moment. But there are a lot of bullish facts right now.

I expected a good selloff on the Ga election results, so what do I know?

I expect the opposite - markets are going higher with the Biden stimulus and infrastructure spending.

 

[Montecfo]

I expect the opposite - markets are going higher with the Biden stimulus and infrastructure spending.

I expected a sell-off in the short term only.. I previously said I expected stocks to rally after the presidential election no matter who won, though for somewhat different reasons.

The US economy is a coiled spring, corporate balance sheets are flush with cash to do acquisitions, buy backs, and capital investment.
You have millions of people who will be getting back to work, historically low interest rates continuing for years, earnings comparisons are easy, inflation subdued, Congress still feels it can spend with impurity, the vaccine put and many other reasons.

 

[Markola]

USGrant I think has it largely correct. You cannot make sense of stock values while ignoring interest rates. They are the most critical single metric driving equity valuations and they are at historic lows.

Similarly, home values are way up, thanks to these low interest rates. Our neighborhood’s average home values were up over 8% in 2020 alone. Historically, for 30 years our particular home’s value has grown 4%+/year. Projected out another 20-30 years, the numbers become meaningful and I expect to realize a portion of those equity gains into our stock and bond portfolio someday when we inevitably sell.

This is my 4th house, so I am well acquainted with all of the extensive operating costs involved in homeownership, which detract from the 4%/year leveraged growth. It beats a sharp stick, though.

 

[corn18]

@corn18

What is your take on the interest rate trend, compared with the p/e chart that you posted?

Interest rates 20 years ago were about 400% higher than they are today. What effect does that have on asset prices?

Great question. I think all the free money is driving earnings per share. If I were running a billion dollar company and had access to 0% debt, I would be grabbing all I could and buying as much stock back as possible. The Fed has been trying to limit that, but I can buy back share with my free cash flow from earnings and then use the 0% debt to fund my company. The smart ones will try to grow the top line with the debt. The really smart ones will try to grow the top line and bottom line. I think there are a lot of dumb ones that are just pissing away the cash.

Can you tell where the cheap money started?

While this is concerning, the end result is a simple market correction (say 50%) followed by a normal recovery of 3-5 years. There isn't any defect in all of this, just greed.

I have been perplexed as to why inflation hasn't kicked in, but I think it has, we're just not seeing it yet. Most of the cheap money has gone to corporations, not consumers and then the pandemic hit. And Americans are saying like crazy:

If the consumer gets more confidence (pandemic over, lots of money from Congress direct to the consumer), then spending will pick up and inflation should follow. If the Fed does their job, I think they should be able to keep it below 4%-5%, which might be ok. Anything more than that and things will get ugly.

What's all this mean to us? Rudder amidships, steady as she goes. This too shall pass.

 

[Montecfo]

Similarly, home values are way up, thanks to these low interest rates. Our neighborhood’s average home values were up over 8% in 2020 alone. Historically, for 30 years our particular home’s value has grown 4%+/year. Projected out another 20-30 years, the numbers become meaningful and I expect to realize a portion of those equity gains into our stock and bond portfolio someday when we inevitably sell.

This is my 4th house, so I am well acquainted with all of the extensive operating costs involved in homeownership, which detract from the 4%/year leveraged growth. It beats a sharp stick, though.

I think the housing bump is driven by Covid (people working from home so they don't have a commute they can live further out they need more space for the same reasons etc) and a flight to the suburbs and exurbs for many of the same reasons plus others such as desire for more safety.

It may go on for a while but those things also run in cycles.

 

[pb4uski]

I see it more as the 1920s. We are about to have a post-war post pandemic boom after the vaccines hit. Understand I mean early 20s not 1929.

Why would that be? Would you have expected a roaring 20s boom in January 2020? If not, then why in January 2021? At best, and I really don't believe this, if there were 3/4 of a year of pent up demand that wouldn't seem to cause a long boom.

 

[Markola]

I think the housing bump is driven by Covid (people working from home so they don't have a commute they can live further out they need more space for the same reasons etc) and a flight to the suburbs and exurbs for many of the same reasons plus others such as desire for more safety.



It may go on for a while but those things also run in cycles.

I’ll grant that it’s topsy turvy due to Covid and working from home and, unfortunately, safety concerns. We have parts of our city with the recently hot lofts prices are down, due to people suddenly wanting a yard and more room. Our neighborhood probably fits the bill for such fleers but the record low mortgage rates are certainly part of what’s driving it, too.

 

[pb4uski]

Historical Home Price in the US (Median value 1951-2020)

^^^ Attachment might be nice.

 

[corn18]

is this it?

Looks like a reversion to mean is highly likely in the near future. IMHO.

 

[Markola]

^^^ Attachment might be nice.

Sorry, I was fiddling with the source page to make it attach. Corn18 beat me to it. Thanks.