
U.S. stock valuations haven’t been this extreme since 1929 and 2000 - omarchowdhury
http://www.marketwatch.com/story/us-stock-valuations-havent-been-this-extreme-since-1929-and-2000-2017-08-22?link=sfmw_fb
======
nfriedly
If you're working a job that isn't directly related to the stock market, and
are not about to retire, then you really shouldn't care if the stock market is
about to crash or not.

Set up automatic investments into a Vanguard Target Retirement fund (or
whatever), and know that whenever the next crash does come, you'll get an
exceptionally good deal that month.

Here's some good advice on the subject:
[http://www.mrmoneymustache.com/2017/06/20/next-
recession/](http://www.mrmoneymustache.com/2017/06/20/next-recession/)

~~~
closeparen
>a job that isn't related to the stock market

No such thing, except for _maybe_ the government. If your business isn't
sensitive to its stock price, its customers/suppliers/financiers are. Or their
customers/suppliers/financiers are. Everything is connected, if you exist in
the modern economy, you don't exist in a vacuum.

~~~
nfriedly
You're correct, I'm gong to edit it to say "not _directly_ related", but the
point I was trying to get to remains: don't worry about things that you have
absolutely no control over and no good reason to worry about.

~~~
1_2__4
I'm sorry but that's just awful advice. Just because you don't have control
over something doesn't mean you can't foresee it and take appropriate action
to protect yourself in advance.

~~~
enraged_camel
You cannot time the stock market. Trying to predict a crash and taking money
out in an attempt to avoid losses is a recipe for disaster.

For individual investors who use the stock market for their retirement funds,
the appropriate action to protect oneself from the fluctuations of the market,
including crashes, is to have the appropriate retirement target set, along
with the proper level of acceptable risk (which automatically allocates the
funds among different asset classes). After that, it's a matter of waiting...
and not doing anything rash during extreme events.

~~~
Ntrails
>have the appropriate retirement target set, along with the proper level of
acceptable risk

You make that sound so _easy_. It's not. None of the maths of retirement
planning is hard - but the actual decisions really kind of are.

For example, I've got 10% in corporate debt. Is that more or less risky than
Equity? What's the distribution? What's the correlation? How does it compare
with Reinsurance, or Property? Is property strongly correlated with the stock
market at the tails, or is it a diversifying asset class? Does my passive fund
hedge currency risk? Do I want it to? Is private equity a good or a bad idea?
Do I want FTSE ALL or FTSE 100?

How about looking at risk appetite. What is the most time it could take for my
retirement savings to recover to inflation adjusted parity after a crash (I
feel like 15 years is the historical max, but it's a vague memory). Should I
look at risk in terms of retirement income or retirement date? Do I expect
Annuity rates to improve (e interest rates to go up) or should I mark to
current rates for planning purposes.

I think about the amount of context that trustees for DB pension schemes
needed to make investment decisions that were sound, and I can't help but
wonder how we've ended up with individuals making these decisions on their
own. I've long felt that outside of fees Diversified Growth Funds (Multi Asset
Funds?) are a pretty good place to "inactively" manage retirement savings.
After fees I'm less convinced. I suspect the Australian model might be closest
to what I internally model as best?

~~~
turk183
If it's any consolation, 2008/9 proved that everything is pretty much
correlated--stocks went down, bonds went down, everything went down. There
were no safe havens except for massive government bailouts. To this day, the
illegal acts that banks undertook to stay afloat have not been prosecuted
(moving all unperforming assets to "off balance sheet vehicles" like holding
companies). Also, mark-to-market accounting was suspended and has never been
reinstated.

~~~
pragmatic
One notable exception: Farm land.

------
YZF
The 10 year US bonds haven't had such low rates and for such a long time at
least since 1962 (as far back as the Yahoo Finance data goes). Inflation is
low. Your belief in the valuation should be linked to how you feel about rates
and inflation. If rates stay this low for a very extended period than the
valuation might be on the low side. At any rate, these are unchartered
territories in terms of investment returns and valuations.

EDIT: even going back to 1912 the 10 year rates are unusually low for an
extended period. The closest historic period is during the 1940's valuations
back then (P/E ratios) were lower (peaking around 1946).

~~~
nl
(US Loan) interest rates (which are related to bond prices) are around the
lowest they have been in recorded history (~5000 years):
[https://www.businessinsider.com.au/chart-5000-years-of-
inter...](https://www.businessinsider.com.au/chart-5000-years-of-interest-
rates-2015-9)

------
jedberg
This article felt more like an ad for active money management (and ignoring
index funds) than anything else.

Which makes sense. It's driving active managers nuts the techtonic shift to
passive investing.

This was a good podcast on active vs passive investing:
[http://freakonomics.com/podcast/stupidest-
money/](http://freakonomics.com/podcast/stupidest-money/)

~~~
cromwellian
Yep, the opening claiming leaving your money in an index fund amounts to
"speculation" seemed bizarrely backwards to me. So trying to pick winners and
losers isn't speculation, it's investing, but investing in a balanced
portfolio spreading risk over the long term is? The latter is only speculating
that over the long term, there'll be more winners than losers in your
portfolio. The former relies on making individualized bets correctly.

How many portfolio managers beat long term returns to the S&P 500? Not many
that I've seen.

~~~
twelve40
That's not what they claim though. They claim that significant exposure to US
stocks, especially via indexes, right _at this moment_ looks risky since the
entire US market is overheated and it requires an active investor to find any
reasonable deals, if there are any left.

At the same time, they could be both wrong about overheated part, and lobbying
to get some active investing fees, sure, but if you do take the viewpoint of
the currently overpriced market, then the speculation claim doesn't seem too
bizarre.

~~~
makomk
If the entire US market is overheated because too much capital is chasing too
few investment opportunities, which is the likely cause, then trying to cram
that money into an even smaller set of investments is obviously not going to
help matters. It'll sure help line the pockets of the people running the
active investment funds though.

------
TheAdamAndChe
The miscalculation that I believe economists are making is the massive shift
in leverage between the laborers and the owners. Historically, the two were
balanced to the point that creating greater economic growth would tip the
scales in the laborers' favor, thus increasing wages and inflation. What's
happening now is that, due to many factors including outsourcing, illegal
immigration, lobbying(bribery), capital concentration, anti-union legislation,
anti-small business legislation, and a lot more, the scales are tipped so far
in big business's favor that monetary policy is having a limited effect.

I honestly don't know if this trend can be reversed without something major
happening.

~~~
aswanson
That sounds like a suggestion that something very bad has to happen.

~~~
TheAdamAndChe
Nothing _has_ to happen. Mass media makes propaganda much easier to spread,
and I consider it very likely that nothing will happen and inequality will
strengthen for a long time. My point is that the system seems to be stuck in a
positive feedback loop where greater capital concentration strengthens the
system that created capital concentration in the first place. _Something_
would need to facilitate the movement out of that loop, and historically
events required to lower inequality(world war, civil war, lower-class
uprisings) haven't been pleasant.

~~~
lazerpants
>(world war, civil war, lower-class uprisings)

You forgot plagues, not that those are more pleasant.

------
WilliamSt
Assuming the market keep on growing over time as it has done for a very long
time, all time highs aren't something spectacular or unusual in the stock
market, in fact it occurs almost on a daily basis.

As an analogy; if you go to a grocery store, all the items on the shelves are
at an all time high price, but no one is expecting the price of milk to drop
drastically just because it's at an all time high.

~~~
empthought
The price of milk is not generally subject to speculative bubbles, though.
When it is (let's say some kind of shortage rumor or disaster prep) the price
indeed crashes after reaching absurd levels.

~~~
YZF
I wouldn't call where we are a speculative bubble. If you look at the P/E or
dividend rates of stocks and compare that to other investments you'll see they
are still favourable. So a decision to e.g. own MSFT stock that a higher
dividend than you'd get in a 10 year bond, while not without risk, isn't pure
speculation. MSFT has a business with good prospects and it makes money and
pays it back to you. Where else do you put your money?

------
dbjacobs
At the market level, stock returns only come from 4 things: dividend yield,
real earnings growth, inflation, P/E expansion/contraction.

Looking at 10yr+ returns, the dividends and real earnings growth are likely to
be relatively stable. The big wild card is P/E expansion/contraction. Dividend
yield + real earnings growth gives us a baseline real return of around 3.6%.

A 30% PE contraction over the next 10 years would bring that return down to 0%
and would still leave the PE at historically high levels. A return to
historical valuation levels would mean a negative return in the neighbourhood
of -3% annually.

Of course, it is also possible for PE to expand another 30% over the next
decade causing stocks to deliver great returns.

Which scenario the world follows is more due to sentiment than economic
performance which is why it is not predictable. Although there is certainly a
probability bias towards the downside

With that said, valuation levels tell you a tremendous amount about risk
levels, which are VERY high right now. Which might inform you to lower your
stock exposure if you can't handle a large drop in pricing (either due to not
being able to sleep at night or the effect it would have on your lifestyle).

~~~
turk183
I think PE has failed as a marker because there's too much capital chasing too
few investments so of course PEs will be astronomical. High PEs don't mean
what people think they mean or once meant.

------
KKKKkkkk1
Some dude with a blog predicts an impending stock-market crash. Well, Robert
Shiller, the Nobel Prize laureate, has been predicting a stock-market crash
since what, 2016? And the market kept on rising. This is not to imply that a
crash or a long period of low returns is not coming, just that the opinions of
financial pundits are just that.

~~~
brndnmtthws
It's the same news cycle over and over:

[https://trends.google.com/trends/explore?date=today%205-y&q=...](https://trends.google.com/trends/explore?date=today%205-y&q=stock%20market%20bubble,stock%20market%20correction)

Doomsday predctions have always been good at generating ad revenue for
publishers.

~~~
c3534l
Sure, but recessions and depressions are not something that is really all that
rare. Unlike doomsday predictions, if you predict a crash you'll probably be
right within a decade at least by pure chance alone.

------
freefm
Even if there is a global downturn, the US economy will remain strong. Where
else is capital going to go? If developing economies go bust, developed
nations like the US will buy up their assets in a fire-sale.

~~~
exelius
China just opened up outside investment this week. Chinese capital already
owns way more of America through various investment vehicles than we are
willing to admit.

We abdicated our global leadership to China the day Trump was elected. Our
economic leadership will likely follow in the next decade.

~~~
freefm
China's economy is highly dependent on Western consumption of their goods. If
the US went into recession, and Americans significantly cut back on their
consumption, which many of them certainly could afford to without going into
poverty, wouldn't that wreck China's economy?

~~~
fooker
>China's economy is highly dependent on Western consumption of their goods. If
the US went into recession, and Americans significantly cut back on their
consumption, which many of them certainly could afford to without going into
poverty, wouldn't that wreck China's economy?

No, they will manipulate their currency or adjust prices so that more people
from China and India buy that stuff. Adding a few hundred million consumers
will not be that difficult with those measures.

~~~
mywittyname
The Fed manipulates US currency too. We just don't call it "currency
manipulation" because, conveniently, the definition of currency manipulation
is buying _foreign_ currency. Buying up your own currency/bonds or increasing
reserve requirements achieves the same result.

------
benlorenzetti
Between monetary policies from the Fed that have increased the base money
supply by a factor of >5 since 2008 [1], and sustained trade imbalances on the
order of tens of billions per month [2], it should not be surprising that
stock prices are at records highs.

There is just so much more money around that has to be invested but cannot be
used; the recent high in the stock market is not just based on the business
cycle and traditional productivity/population growth.

If this is your take on the stock market's dramatic rise beyond 2008, then
investing further in stocks and indexes may still be the thing to do even if
it feel we're getting ripped off on the price.

1\.
[https://fred.stlouisfed.org/series/WALCL](https://fred.stlouisfed.org/series/WALCL)
2\.
[https://fred.stlouisfed.org/series/BOPGSTB](https://fred.stlouisfed.org/series/BOPGSTB)

------
zzalpha
So don't try to time the market.

Except this time.

~~~
tim333
Don't time it but do value it. Given the low expected returns from the current
levels you might look for something else with better ones. Thought I'm not
sure what exactly.

~~~
zzalpha
Or just diversify and wait. The returns will find you.

------
aswanson
We are long overdue for a correction. Put your money into bonds and buy into
the fire sales in inevitable upcoming crash.

~~~
nemo44x
Bonds are like the biggest bubble! With interest rates being so low they have
almost nowhere to go but up in interest meaning today's bonds will lose
incrediable amounts of value.

If you're going to buy bonds the should be rather short term and at today's
interest rates and low inflation you could also hold cash.

For that reason I'm mainly in stocks with a some bonds and cash.

~~~
gfodor
"They have almost nowhere to go but up" has been being said by people for many
years now when it comes to interest rates. It's a leading statement that
somehow implies that rates are destined to go up because they are so low.

This isn't true. They have a few places they could go. They could go up. They
could go down (ZIRP is a thing.) Or they could do what they've been stubbornly
doing for a long time now, wobble around basically within the same range.

------
nradov
“Stock prices have reached what looks like a permanently high plateau.”

Yale economist Irving Fisher, 1929

------
1_2__4
Anytime a story or study like this comes out I can always visit the HN comment
section to find armchair economists pooh-poohing it. It's like clockwork.

~~~
notfromhere
It's a blog on marketwatch. not exactly hard-hitting research

