Shiller PE at 31.49

[jacob]

Potential growth has been plodding along below its long-term average, weighed down by weak rates of capital accumulation and slow productivity growth, the bank said. The World Bank sees potential growth slowing to around 2 percent between 2018-2027, compared with 2.5 percent between 2013-17. Policy makers should shift their focus to structural reforms to boost potential growth and living standards, it said.

https://www.bloomberg.com/news/articles ... since-2011

Recall that low interest rates don't justify high multiples if growth rates are also low.

[Farm_or]

The broader market could be getting tipsy?

But I read into this bullish for energy. Manufacturing up? Needs energy. Global growth? Energy. Infrastructure improvements? Takes energy. Bit Coin mining? Yep, more energy.

[Mister Imperceptible]

Yes but the world not only needs to grow, it is the *rate* of growth that matters. Investment models have exponential growth built into their expectations + sub-3 percent growth + trillions and quadrillions in carry trade = trouble.

Tell me if you notice a trend:

http://www.multpl.com/us-real-gdp-growt ... le/by-year

Yay.

[arcyallen]

The Shiller PE is highly skewed by data from Jan 1, 2009 where the PE measured 70.91 near the BOTTOM of the market, when things were cheapest. You could have looked at that number in a vacuum and thought it was overpriced, but in reality it was super cheap.

Either way, staying the course and not trying to time your investments based on sentiment is the only way to go. If everyone is giddy, or sad, or whatever, it's just noise. Having said that, if everyone (aka Mr. Market) is super sad and willing to sell you their investments ridiculously cheap and you happen to have the money, buy! But I wouldn't set aside cash (uninvest) until "things go lower", because that is historically a losing game. People have started doing that over the last couple of years, and have lost out on the huge gains we've seen. Now they either have to keep waiting for things to drop below when they sold, or buy at a now higher price.

"Statistics are like bikinis - they show you a lot but can cover up some very important things!"

[liberty]

The Shiller PE is highly skewed by data from Jan 1, 2009 where the PE measured 70.91 near the BOTTOM of the market, when things were cheapest. You could have looked at that number in a vacuum and thought it was overpriced, but in reality it was super cheap.

Wrong. The trailing 12-months P/E was 70.91 on Jan 1, 2009. The Shiller P/E was 15.17.

[Lucky C]

The Shiller PE would never have this 70.91 data point as part of its calculation. You are implying it's an average of a series of P/Es from the past 10 years, but it's actually the current price divided by the average of just the earnings over the past 10 years.

Earnings were abnormally low in late 2008 / early 2009, but they are also abnormally high now. Since 2014 we have seen >10% profit margins in the S&P 500, which was not achieved in previous market cycles. This multi-year span of abnormally high profits could result in a lower CAPE than maybe it "should be," moreso than the poor earnings in the recession could result in a higher CAPE than it "should be." Or maybe these two abnormally low & high earnings scenarios more or less cancel each other out, which would mean the CAPE is serving its job as a smoothing function nicely.

[arcyallen]

Lucky C: I consider myself a pretty smart guy when it comes to investing details, but you're right. Despite me doing a lot of research on what it is and what data is used, I was assuming an incorrect formula for calculating the Shiller PE. Thanks for clarifying.

liberty: Relax. I -was- referring to the trailing 12 month PE. Usually if someone refers to a PE generically they're referring to the trailing 12 months, or sometimes the estimated forward.

I think one of the reasons I like this forum over others is that it seems more civil. Thanks Lucky C for keeping it that way.

[Seppia]

Either way, staying the course and not trying to time your investments based on sentiment is the only way to go. If everyone is giddy, or sad, or whatever, it's just noise.


Having said that, if everyone (aka Mr. Market) is super sad and willing to sell you their investments ridiculously cheap and you happen to have the money, buy!

These two statements seem to be at least partially in contradiction. If you can tell when it's cheap you can also tell when it's expensive.

I'm personally in the camp of "timing the market is impossible, but I try stay a little more prudent when valuations are historically way above the norm, and aggressive anytime else".
By any possible value measure, US stocks are now very expensive. Doesn't mean they can't go up even more, but the chances of having the "historically average" 6.5% real returns over the next 10-15 years at these levels are very slim.

[arcyallen]

I agree that sounds a bit contradictory, it accurately describes my sentiments. I think if you have access to cash after a large market drop it's perfect to go all in on stocks. That's rare, but for an example in 2008 I was tempted to sell a car to invest the cash. I wouldn't do that today!

What I'm finding now is people moving to cash for some of their investments, so they'll have "dry powder" after the next correction. That sounds good but just doesn't work. There's too much to lose between now and then.

Stock market valuations are a funny thing regarding "cheap and expensive". As their prices over time are always going up generally, expensive today will likely be cheap ten years from now. If someone sold today at apparently expensive prices and the market went up only 1-2% a year, those same expensive/sell prices would be looking pretty attractive! But we can't tell what's going to happen over the next few years.

[classical_Liberal]

...

[Seppia]

What ERN analysis on cash cushions is missing, in my opinion, is the psychological aspect.
I know that at least for me, having some "dry powder" is of great help in avoiding panic selling.
I lived through it in 2008-9 (though with much less money than now), and having that extra cash to buy Axa stock at 15€, then at 10€ and lastly at 5,9€ when I initially had bought it at 20€ helped me stay sane and avoid stupid mistakes.

I ended my 2017 saving 75% of what I make, and I now have a relatively large sum of money invested (around 20 years of expenses). A few percentage points of missed gains are nothing if thanks to that I can "buy" downside protection.

I think (maybe because there's so many engineers?) that the ERE-FIRE communities often underestimate the impact their brains/instincts can have on their future behavior.
It's very easy to "stay the course no matter what" when your investing life started after 2009.

[liberty]

@arcyallen I see. Should have phrased that differently - sorry.

[classical_Liberal]

...

[Farm_or]

@sepphia Well put. Living through the 40% decline was different from looking at the graph after the fact.

I still remember the distraught of my peers riding the coaster down. On the graph, it doesn't look that long before that 40% came back, but it seemed a lot longer while the stomach acids were eating ulcers.

[frommi]

Now since a lot of you guys believe in indexing and EMH, does it make sense to worry about the Shiller PE?
If the market is efficient, can there be an overvalued market?

[IlliniDave]

Now since a lot of you guys believe in indexing and EMH, does it make sense to worry about the Shiller PE?
If the market is efficient, can there be an overvalued market?

Those don't necessarily go hand-in-hand. The champion of indexing, Jack Bogle, is "skeptical" towards the EMH, for example.

Also "efficient" and "accurate" are not synonyms. FWLIW, my way of thinking about EMH is that it would assert securities are continually priced in accordance with the aggregate belief of market participants based on all publicly available information. That doesn't mean market participants are not incorrect, or that new information (or other stimuli) won't come along that drastically changes the aggregate opinion.

People that like to own index funds come in many stripes.

Those that are devoted to "buy and hold" would say don't worry about Shiller, studies show that historically people who try to time the market underperform noticeably in the aggregate. If you're investing for the long haul you're better off just closing your eyes and gutting it out. If you're in it for the short run, your stock exposure should be low enough that a tumble won't hurt too much.

Those who are a little more fidgety (like me) might change their AA moderately to lean away from stocks (something I am doing) but not bail entirely, despite what those studies say.

Others will bail entirely. Too many will do so after the plunge if that turns out to be the scenario that will cause valuations to unwind.

I think the main value of something like the Shiller pe (or similar metrics) is that it is a decent way to gauge future returns if you want to look over a 10-20 year horizon. When it's high, returns in the next decade or two will probably be lower, if it is low the converse is true. I recently redid my forward-looking planning number and came up with something 2% real for stocks over the next 15ish years (assuming the period ends with Shiller PE at 22, which is just a blatant guess on my part, but not unreasonable). Pretty bleak and it has me looking at adding another year or two to my work life beyond my current planned date.

I buy index funds because the drag of management costs is about as low as it gets, and their tax efficiency is typically very high in comparison to higher turnover funds. There really is no magic to them, or folly if properly understood. They are just baskets of stocks (or bonds). They don't need "strong" EMH to do their job.

[frommi]

I was just trying to be a bit provocative. I use Tobin`s Q, Shiller P/E, Marketcap/GDP and Trendline regression to define a fair value for the stock market and adjust my net long exposure according to that measure. All four methods point to overvaluation of roughly 40%-45% right now, so it is not just the CAPE ratio alone. I am just a little amused by index investors that talk about market timing.
At the moment most of my money flows into REIT`s, asian value stocks and shorts.
I am not sure if just working longer does it, that one year can turn out to be 4-5 years, because you won`t earn money on your invested funds when your forward market return estimation is true. Doesn`t it make more sense to use the time to learn about how to find investments with higher returns?

[IlliniDave]

I am just a little amused by index investors that talk about market timing.

Why? Index funds are just portfolio pieces, not religious vows. I don't know if it is still true, but at one time recently SPDR was among the most frequently traded securities in the world. Maybe it was at the top.

I am not sure if just working longer does it, that one year can turn out to be 4-5 years, because you won't earn money on your invested funds when your forward market return estimation is true. Doesn`t it make more sense to use the time to learn about how to find investments with higher returns?

I don't have any idea how much my investments will go up or down in the next year or two ("irrational exuberance" was called 4 years before the markets actually unwound). I won't bore you with all the details, but once I get beyond the minimum retirement age at my employer, my pension goes up rapidly each year I delay taking it. Plus, each year I wait is one year I don't need the portfolio to support me. 5 years from now (3.5 after my planned exit date) I would not need to spend a penny of my portfolio and would be adding to it from excess pension income (and later SS). So it's just a matter of finding a comfortable place on that curve that balances with lower expected returns. All my plans were drawn up with a 3.5% expectation, so a little under 2% (to account for bonds detracting from a guess of 2% for stocks) is not all that far off.

I've been at this investing thing for a long time, and know my strengths and shortcomings pretty well. I don't think in a year or two I'm going to discover some new thing to invest in that will meet my willingness to take risk at this juncture and provide superior returns. All my new money is going into bonds. The nice thing about them is that although they won't make me rich, they are predictable (since I don't trade them). Once I get a big enough pile of them that they dovetail with the pension I should be good. If I go beyond that it means I've succumbed to greed.

[frommi]

I think the main value of something like the Shiller pe (or similar metrics) is that it is a decent way to gauge future returns if you want to look over a 10-20 year horizon. When it's high, returns in the next decade or two will probably be lower, if it is low the converse is true. I recently redid my forward-looking planning number and came up with something 2% real for stocks over the next 15ish years (assuming the period ends with Shiller PE at 22, which is just a blatant guess on my part, but not unreasonable). Pretty bleak and it has me looking at adding another year or two to my work life beyond my current planned date.

I buy index funds because the drag of management costs is about as low as it gets, and their tax efficiency is typically very high in comparison to higher turnover funds. There really is no magic to them, or folly if properly understood. They are just baskets of stocks (or bonds). They don't need "strong" EMH to do their job.

I apologize, i shouldn`t have started this discussion. I always forget that there are people out there that are not interested in investing and that are using index funds for convenience. Thats fine!

[bryan]

Now since a lot of you guys believe in indexing and EMH, does it make sense to worry about the Shiller PE?
If the market is efficient, can there be an overvalued market?

Two economists are walking down the street and one of them notices what appears to be a $20 bill (or a $100 bill—the monetary amounts vary) on the sidewalk. “It’s not a real $20 bill,” the other economist declares. “If it were a real $20 bill, someone would have picked it up off the sidewalk already.” (a joke that's been around since '84)

I like to think of "Efficient Market Hypothesis" as an economist (misnomer) joke. I (and probably everyone else since it was coined) use the term as short-hand to communicate that certain meaning, concept. If one actually "believes" in it...

As for "can there be an overvalued market", it depends on whose viewpoint, knowledge, prediction you take.