Valuation as a predictor of stocks returns

[FREE866]

Numerous times over the past 30+ years of investing and ESPECIALLY in the last ten I see concern over "valuations" and how they spell trouble for stocks. Following that narrative can be very damaging to returns as explained in this article:

https://www.fisherinvestments.com/e...ont-think-high-valuations-signal-a-dim-future

 

[Luvtoride]

Interesting article. If one were "concerned" about valuations, we probably wouldn't be in the stock market at all.
Are you a client of Fisher Investments (who the article was from)? How do you find them?

 

[yakers]

The market can stay irrational longer than one can stay solvent.

Valuations are IMHO crazy but what to do with investments, stocks, bonds, real estate & alternatives. I have the first three. Over time the market should do fine, @70 I don't know how long to wait. Current AA is about 55/45, just as unhappy with stocks & bonds so probably in the right place for me.

 

[FREE866]

Interesting article. If one were "concerned" about valuations, we probably wouldn't be in the stock market at all.
Are you a client of Fisher Investments (who the article was from)? How do you find them?

I am not a client of Fisher. I just follow him on Twitter and LinkedIn and think he’s brilliant. I did read his book Debunkery which I found excellent. So much noise out there and I really feel like he cuts through the often wrong media narratives and flawed conventional wisdom.

 

[sengsational]

Does the data of that article adjust for inflation?

 

[ExFlyBoy5]

30+ years of the past doesn't equal the way things are today. And I agree w/ the sentiment that if you were to use valuations as a good reference then many of us would be very shy of the market.

 

[bloom2708]

If stocks generally move higher over time, won't valuations always be "high" and get "higher" over time?

Yes, there will be setbacks, dips, drops. But on the flip side, many years will set new highs many times.

"Oh the markets are so high..." Well hopefully they keep going higher and feel "higher".

 

[plex]

There is a difference between a high stock market and high valuations. The market could still go high with normal valuations, just not as high. Valuation is a combination of price and earnings. High valuations means the prices are skyrocketing past their earnings. This can be expected to some degree with growth stocks, but the difference is relatively moderate. Currently the PE ratios are entering all time highs, and the lack of earnings should not be rationalized away, similar to what was done in 2007 and 1999 when PE's were also at high points. There is too much cash in the market, and companies are not able to properly make use of it, when that has happened in the past, it has not gone well.

I believe the Fisher article falls within a typical vein of active investment companies. They like to make it seem like the markets in the long run are much more complex than they actually are by presenting how unpredictable the markets are in the short run. They try to justify their existence by through these articles, to make investors feel it is too complicated for them. I did not see any useful information in this article honestly.

 

[FREE866]

I believe the Fisher article falls within a typical vein of active investment companies. They like to make it seem like the markets in the long run are much more complex than they actually are by presenting how unpredictable the markets are in the short run. They try to justify their existence by through these articles, to make investors feel it is too complicated for them. I did not see any useful information in this article honestly.

I think people absolutely use "valuation" and "high PE" as a metric to determine what stocks will do in the future. I've heard that rhetoric pretty consistently for decades. I think the article pretty thoroughly debunks that myth with actual numbers

 

[plex]

The article is a very strange one in fact, their words say, "high P/Es can still deliver very good 20-year appreciation...," but then you look down at the graph they cite and it shows...the exact opposite, the low P/E's have very good 20-year returns at mostly 4-15%, and the high P/E's have consistently bad returns (still good enough though at mostly 4-8% because the SP500 has had quite a good run in the past 100 years).

The outlier high P/E years in the graphs are also a bit misleading, a bad year, or 20-year period will generally not have a high P/E, the highest P/E's generally occur just before those really bad recessionary years, and as such, are never one of the worst returning years/periods, similar to concept of sequence of returns.

 

[Lsbcal]

Schiller nowadays compares PE10 to the 10 year Treasury. The "excess return" of the SP500 over Treasuries is not unusually low:

You can see the year 2000 was a low with subsequent 10 year results really poor. But note that this infers we might be OK long term and it says nothing about the near term.

I find that comparing Vanguard asset classes, the growth index PE's are very high relative to past years but the value indexes are not relatively high.

 

[FREE866]

The article is a very strange one in fact, their words say, "high P/Es can still deliver very good 20-year appreciation...," but then you look down at the graph they cite and it shows...the exact opposite, the low P/E's have very good 20-year returns at mostly 4-15%, and the high P/E's have consistently bad returns (still good enough though at mostly 4-8% because the SP500 has had quite a good run in the past 100 years).

i think he clarifies the actual data with this:

The best forecasting job P/Es have done is around a 20-year time horizon, where stocks’ future returns correlate with P/Es 27% of the time—an R2 of 0.27—a weak relationship. Statisticians generally require an R2 above 0.70 to have any explanatory power.

 

[chassis]

Read Jurrien Timmer on Fidelity. He is on Twitter and LinkedIn also.

He suggests a "valuation" kpi of price/(buybacks+dividends), or price to total cash. He charts this and it shows that in historical terms today's market is not overvalued.

Long term decline in interest rates also need to be brought into any discussion on valuation.

Bonds stink today. To high heaven.

The money has to go somewhere. It's going into equities.