What would S&P500 be if market valuations returned to average historical level?

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WhitePuma
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What would S&P500 be if market valuations returned to average historical level?

Post by WhitePuma »

Trying to get a sense of just how overvalued the market is. It may help guide my AA.
sc9182
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by sc9182 »

I would defer to such a time when:

A) Inflation returns to historical normalcy and stabilizes
B) Interest rates should hit historical levels and stay-level
C) Un-employment returns to historical (ie., much higher/worse) levels
D) World-wide Geo-conflicts improves somewhat
E) Housing prices/price-gains have to fall down to historical Case-Shiller levels
F) Mortgage interest rates have o come down to last 10-15 years levels
G) Magnificient-7's over-contribution to S&P gains -- returns to normal/historic levels
H) AI - if it doesn't make significant changes to productivity, and new business opportunities - may be future would returns to historical levels; otherwise, if AI turns out to have some punch/productivity-gains to it -- can't promise if future returns to the current historical levels.
I) Taylor Swift concert tickets start to become affordable ever-again !?

Sorry for the last-point, but you got an idear!
Last edited by sc9182 on Tue Jul 09, 2024 1:59 pm, edited 2 times in total.
aristotelian
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by aristotelian »

I don't use market conditions to determine asset allocation. Depending on time period and method (mean/median etc) it appears the market is close to twice as high as it "should" be, but the market knows this and still prices it at the current level.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Normchad »

You say it’s overvalued. Understand though that for every seller, there is a buyer. And the buyers don’t think it’s overvalued.

There is no “planks constant” or natural universal constant that represents the “correct price”. According to a lot of press, it’s been very overvalued for the last 30 years.

Lots of people sort of agree with the notion that something is worth whatever somebody will pay for it. Except seemingly when it comes to buying an ownership interest in some of the most successful companies on earth.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by the_wiki »

Normchad wrote: Tue Jul 09, 2024 11:42 am You say it’s overvalued. Understand though that for every seller, there is a buyer. And the buyers don’t think it’s overvalued.
There were plenty of buyers in 2021, 2008, 2000, etc. Not really a good indicator of value. Often the buying gets very frenzied right before a big drop.
Firemenot
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Firemenot »

There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
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WhitePuma
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by WhitePuma »

Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this last part?

And duly noted about foreign stocks, but I’m not comparing those to the S&P500.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Firemenot »

WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this?
Lots of ways. Do some research. Or switch to a fund that’s doing it. Lots of customers like you I’m sure. Not something I’d do myself.
Last edited by Firemenot on Tue Jul 09, 2024 11:59 am, edited 1 time in total.
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WhitePuma
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by WhitePuma »

Firemenot wrote: Tue Jul 09, 2024 11:58 am
WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this?
Lots of ways. Do some research.
That’s not helpful. Me posting on here is an attempt to get info.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Firemenot »

WhitePuma wrote: Tue Jul 09, 2024 11:59 am
Firemenot wrote: Tue Jul 09, 2024 11:58 am
WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this?
Lots of ways. Do some research.
That’s not helpful. Me posting on here is an attempt to get info.
Not something I’m going to do myself so I’m not going to do it for you. Ask perplexity AI. Short those stocks if you like. Build your own pseudo index without those stocks or light those stocks. Invest in a product doing it.
Last edited by Firemenot on Tue Jul 09, 2024 12:05 pm, edited 3 times in total.
rockstar
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by rockstar »

There is a quantitive measure of over bought and under sold. Valuation is tough because the make up of the S&P 500 has changed over time. The winners have greater margins than in the past too. How do you determine what’s the appropriate valuation?
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by ez_mode »

Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
You can remove those 7 companies, and the return of US stocks is still significant. IVE, S&P 500 Value, removes those stocks and has done very well:

https://testfol.io/?d=eJytj8FKAzEQht9lz ... XdzCfWFKld
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GarfieldBogle
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by GarfieldBogle »

Current Shiller P/E (10 year rolling average) is 36.3 for the S&P500. The 100+ year average is 17.1. The S&P500 currently trades for 5,580.

That would suggest the S&P500 is 52 percent overvalued, and the "fair value" is ~2,900.

But, how do you know that that the P/E above 17.1 is "overvalued"? Valuation metrics change over time and business cycles.

As always, this post isn't investment advice for anyone... myself included.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Firemenot »

GarfieldBogle wrote: Tue Jul 09, 2024 12:02 pm Current Shiller P/E (10 year rolling average) is 36.3 for the S&P500. The 100+ year average is 17.1. The S&P500 currently trades for 5,580.

That would suggest the S&P500 is 52 percent overvalued, and the "fair value" is ~2,900.

But, how do you know that that the P/E above 17.1 is "overvalued"? Valuation metrics change over time and business cycles.

As always, this post isn't investment advice for anyone... myself included.
People have seriously been posting just that sort of analysis for 10-15 years on Bogleheads. Anyone that listened to it and acted on it was much the worse for it. The 10-yr rolling average business is worthless.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by toddthebod »

WhitePuma wrote: Tue Jul 09, 2024 11:59 am
Firemenot wrote: Tue Jul 09, 2024 11:58 am
WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this?
Lots of ways. Do some research.
That’s not helpful. Me posting on here is an attempt to get info.
You can direct index and exclude those companies. You can short sell those companies, or just short a mega cap fund. You can invest in an equal weight fund. You can invest in all the sector funds except tech. You can invest in an extended market (or small plus mid caps) fund. You can invest in a dividend or value fund. Lots of ways.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by warner25 »

GarfieldBogle wrote: Tue Jul 09, 2024 12:02 pm Current Shiller P/E (10 year rolling average) is 36.3 for the S&P500. The 100+ year average is 17.1. The S&P500 currently trades for 5,580.

That would suggest the S&P500 is 52 percent overvalued, and the "fair value" is ~2,900.

But, how do you know that that the P/E above 17.1 is "overvalued"? Valuation metrics change over time and business cycles.
Right. Just a couple days ago I pointed out that:
warner25 wrote: Sun Jul 07, 2024 3:25 pm...even a 50-60% drop would only bring the S&P 500 down to the median Shiller PE, historically...
And I said essentially the same thing back in 2021:
warner25 wrote: Sat Jun 12, 2021 10:22 pm...The S&P 500 would need to tumble 60% to get back to the historical average for Shiller PE...

Which brings us to Normchad's point, about whether the "average historical level" is even meaningful:
Normchad wrote: Tue Jul 09, 2024 11:42 am There is no “planks constant” or natural universal constant that represents the “correct price”. According to a lot of press, it’s been very overvalued for the last 30 years.
(Of course, even by the standard of the last 30 years, today's valuation is remarkable. Shiller PE has only ever reached this height of 36 between 1998-2000 and in 2021.)

This has been the most fascinating sort of... paradox to me about investing theory since I started learning about it in the late 2000s. I think there are some things that explain the difference between the past 30 years (and now) vs. the preceding century. There was the introduction of the 401k and IRA in the 1980s and 1990s. In conjunction with that, there was the subsequent spread of information (both more research, due to more interest from people managing their 401k and IRA, and more accessibility due to the Web) about investing which has mostly taught people to invest in stocks (especially US stocks) because they were arguably just undervalued over the preceding century and thus provided fantastic returns. See also good competition among fund families and custodians, and greater regulation of those companies and the market, which has all made things safer and better for investors who might have previously chosen only US savings bonds and bank CDs. So I'm somewhat convinced, while still remaining skeptical of US stocks due to valuations.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Normchad »

the_wiki wrote: Tue Jul 09, 2024 11:50 am
Normchad wrote: Tue Jul 09, 2024 11:42 am You say it’s overvalued. Understand though that for every seller, there is a buyer. And the buyers don’t think it’s overvalued.
There were plenty of buyers in 2021, 2008, 2000, etc. Not really a good indicator of value. Often the buying gets very frenzied right before a big drop.
I was buying during all of those times and am super happy I did. I wish I could buy shares again at those prices.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by the_wiki »

WhitePuma wrote: Tue Jul 09, 2024 11:59 am
Firemenot wrote: Tue Jul 09, 2024 11:58 am
WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this?
Lots of ways. Do some research.
That’s not helpful. Me posting on here is an attempt to get info.
Put more of your money in things that don't hold the mega cap tech stocks. Simple as that.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by the_wiki »

Normchad wrote: Tue Jul 09, 2024 12:21 pm
the_wiki wrote: Tue Jul 09, 2024 11:50 am
Normchad wrote: Tue Jul 09, 2024 11:42 am You say it’s overvalued. Understand though that for every seller, there is a buyer. And the buyers don’t think it’s overvalued.
There were plenty of buyers in 2021, 2008, 2000, etc. Not really a good indicator of value. Often the buying gets very frenzied right before a big drop.
I was buying during all of those times and am super happy I did. I wish I could buy shares again at those prices.
That sounds like more proof buyers and sellers have no idea about valuation. If you were buying, someone thought it was a good time to sell. They didn't think stocks were undervalued.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by retired@50 »

WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this last part?

And duly noted about foreign stocks, but I’m not comparing those to the S&P500.
There are other S&P funds to consider that cover other parts of the US market. If you want to stay in the mid cap and small cap space, consider IVOO for the S&P mid cap 400 and VIOO for the S&P small cap 600.

For international stocks, consider VXUS and/or VEA.

Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by WhitePuma »

retired@50 wrote: Tue Jul 09, 2024 12:56 pm
WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this last part?

And duly noted about foreign stocks, but I’m not comparing those to the S&P500.
There are other S&P funds to consider that cover other parts of the US market. If you want to stay in the mid cap and small cap space, consider IVOO for the S&P mid cap 400 and VIOO for the S&P small cap 600.

For international stocks, consider VXUS and/or VEA.

Regards,
I already own VXUS, and it has been “fun” to watch that do nothing.

But back to Us equities. I’m a VTI-er, so I don’t understand why the recommendations to tilt to IVOO or VIOO.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by nisiprius »

WhitePuma wrote: Tue Jul 09, 2024 11:57 am
Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I’m a VTI-er. So, how do I accomplish this last part?

And duly noted about foreign stocks, but I’m not comparing those to the S&P500.
The "top 7 stocks" that are generating all the outperformance keep changing, so it's hard to know which ones to reduce and/or short. Like WhitePuma I don't do it, so I'm not an expert on the ways to do it, but I will mention a couple of obvious ones.

a) Around 2007 or so there was a sort of fad, or a lot of ink spilled, about "fundamental indexing." These are index funds of a sort, but instead of being cap-weighted, the weighting is based on "fundamentals" like dividend yield. That was pitched as keeping them out of irrational asset bubbles. You hear very little about them because their performance has been meh. The top ten stocks in the Schwab Fundamental Large Company Index Fund, SFLNX, only includes five of the "magnificent" and at lighter weight than the S&P 500.

b) Similarly, a value tilt, achieved by adding either a value index fund or a small-cap value index fund will underweight the Magnificent 7.

c) A mid-cap overweight--adding a mid-cap index fund to a portfolio--will reduce the portfolio weight of the magnificent 7.

d) Similarly, RSP, the equal-weighted S&P 500 ETF, holds the Magnificent 7 but only as about 1/500th each in the portfolio, so only about 1.4%.

e) And then there's a revenue-weighted S&P 500 ETF, RWL. I'm just reporting its existence.

I think these are all bad ideas, but I did want to give you an answer to your question.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by rkhusky »

Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by WhitePuma »

rkhusky wrote: Tue Jul 09, 2024 7:43 pm Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
Ah, but if only humans were logical in their decision making.

Remember cabbage patch kids and beanie babies?
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by johnegonpdx »

Using portfoliocharts.com and assuming LCB (large cap blend) is roughly equal to the SP500 . . .
1970-2023 distribution of annual returns

Average: 7.8%
Standard deviation: 17.4%
Distribution of returns is left-skewed, and with a moderate kurtosis.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by yules »

WhitePuma wrote: Tue Jul 09, 2024 8:10 pm
rkhusky wrote: Tue Jul 09, 2024 7:43 pm Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
Ah, but if only humans were logical in their decision making.

Remember cabbage patch kids and beanie babies?
I love beanie babies
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by CyclingDuo »

WhitePuma wrote: Tue Jul 09, 2024 11:13 am Trying to get a sense of just how overvalued the market is. It may help guide my AA.
Since you own VTI, the top three stocks (Apple, Microsoft, and Nvidia) combined account for 17% or the index. The other 83% is in everything else. So we all own everything else as well. :beer

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Re: What would S&P500 be if market valuations returned to average historical level?

Post by rkhusky »

WhitePuma wrote: Tue Jul 09, 2024 8:10 pm
rkhusky wrote: Tue Jul 09, 2024 7:43 pm Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
Ah, but if only humans were logical in their decision making.

Remember cabbage patch kids and beanie babies?
Being fairly priced now is different from being worth more some time in the future.

For the latter, you need to be more specific, eg will VTI return 2% real per year on average over the next 10 years.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by cbs2002 »

WhitePuma wrote: Tue Jul 09, 2024 8:10 pm
rkhusky wrote: Tue Jul 09, 2024 7:43 pm Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
Ah, but if only humans were logical in their decision making.

Remember cabbage patch kids and beanie babies?
But they were not overvalued when collectors were buying them. They were worth exactly what they paid for them at the time.

SP500 index shares are worth what someone is willing to pay for them. People do mental gymnastics trying to convince other people that such-and-such is actually worth more or less than the price, but at the end of the day, the price is the price.

I don't think what you seek is knowable in any way that will give you a long-term edge. Thousands of people who work full time in the financial industry attempt to game this every day, and the results are the prices we see.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by HomerJ »

WhitePuma wrote: Tue Jul 09, 2024 11:13 am Trying to get a sense of just how overvalued the market is. It may help guide my AA.
Just FYI, market has been overvalued (based on the historical average) 99% of the time since 1990.

Changing your AA based on SP500 valuations would have been a mistake for the past 34 years.

https://www.philosophicaleconomics.com/2013/12/shiller/
For most of history, the Shiller Cyclically-Adjusted Price-Earnings ratio (CAPE) oscillated in a pseudo sine wave around a long-term (130 year) average of 15.30. It spent 55% percent of the time above the average, and 45% of the time below–a reasonable result for a metric that allegedly mean reverts. Since 1990, however, the metric has only spent 2% 1% of the time below its historical average–98% 99% of the time above.

The metric’s failure to mean-revert over the last 23 34 years hasn’t been for a lack of reasons. The period covered three recessions, two stock market crashes, and one bonafide financial panic–the likes of which hadn’t been seen since the Great Depression (and a global pandemic). Even in the worst parts of the 2008-2009 crash–at levels that we now look back on with nostalgia as the “buying opportunity” of our generation–the metric failed to provide an accurate valuation signal. In an inexcusable blunder, it basically called the market “slightly below fair value” (see the black circle).

If we’re being honest, there are only two possibilities. Either the “normal” levels of the metric have shifted significantly upwards over the last few decades, or the metric is broken.
Note the above was written in 2013. I adjusted the quote to point out that the metric has remained broken (even gotten MORE broken, since that article was written 11 years ago).

But sure, maybe going forward, using valuations to guide your AA will be useful. It hasn't worked too well for anyone changing their AA for the past 10-15 years, that's for sure. "Expected" returns calculations have been very wrong for a long time.

But maybe going forward, valuations will be a useful metric again.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by jeffyscott »

GarfieldBogle wrote: Tue Jul 09, 2024 12:02 pm Current Shiller P/E (10 year rolling average) is 36.3 for the S&P500. The 100+ year average is 17.1. The S&P500 currently trades for 5,580.

That would suggest the S&P500 is 52 percent overvalued, and the "fair value" is ~2,900.

But, how do you know that that the P/E above 17.1 is "overvalued"? Valuation metrics change over time and business cycles.

As always, this post isn't investment advice for anyone... myself included.
I'm not sure what their methodology is, but RA projects an expected CAPE of 25.5 in 10 years: https://interactive.researchaffiliates. ... valuations

This would still leave it at the 85th percentile and corresponds to expected return of 0.8% real over the next 10 years, per their valuation dependent model. Of course, there is a large range around that from -4.9% to 6.4% real (90% probability range).

An immediate drop to that 85th percentile, would mean a decline of about 27%.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Kendall »

This topic is now in the Investing - Theory, News & General subforum.
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HomerJ
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by HomerJ »

jeffyscott wrote: Wed Jul 10, 2024 10:11 am
GarfieldBogle wrote: Tue Jul 09, 2024 12:02 pm Current Shiller P/E (10 year rolling average) is 36.3 for the S&P500. The 100+ year average is 17.1. The S&P500 currently trades for 5,580.

That would suggest the S&P500 is 52 percent overvalued, and the "fair value" is ~2,900.

But, how do you know that that the P/E above 17.1 is "overvalued"? Valuation metrics change over time and business cycles.

As always, this post isn't investment advice for anyone... myself included.
I'm not sure what their methodology is, but RA projects an expected CAPE of 25.5 in 10 years: https://interactive.researchaffiliates. ... valuations

This would still leave it at the 85th percentile and corresponds to expected return of 0.8% real over the next 10 years, per their valuation dependent model. Of course, there is a large range around that from -4.9% to 6.4% real (90% probability range).

An immediate drop to that 85th percentile, would mean a decline of about 27%.
What were their predictions 10 years ago?

Here's a paper from Cliff Asness in late 2012

https://www.aqr.com/Insights/Research/W ... m=learning

CAPE was 22 at the time. That was still considered VERY high in 2012 (now we consider if pretty close to normal - just 12 years later). He predicted 1% real returns over the next 10 years, with a historical range of -4.4% to 8.3%.

Instead we got like 10%-11% real a year for the next 10 years.

"It's tough to make predictions, especially about the future"
- Yogi Berra
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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HomerJ
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by HomerJ »

Even Shiller himself doesn't believe in just looking at just Shiller CAPE anymore.

He has a new formula that incorporates interest rates as well as 10-year PE ratios

If the guy who invented Shiller CAPE doesn't believe it is predictive any more, why do other people still believe in it?
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by rockstar »

HomerJ wrote: Wed Jul 10, 2024 10:47 am Even Shiller himself doesn't believe in just looking at just Shiller CAPE anymore.

He has a new formula that incorporates interest rates as well as 10-year PE ratios

If the guy who invented Shiller CAPE doesn't believe it is predictive any more, why do other people still believe in it?
Isn’t this the guy that later came out with the animal spirits book? Pretty sure he shifted from quants to behavioral.

Why do folks make investment decisions based on singular things?
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by dogagility »

yules wrote: Tue Jul 09, 2024 8:20 pm
WhitePuma wrote: Tue Jul 09, 2024 8:10 pm
rkhusky wrote: Tue Jul 09, 2024 7:43 pm Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
Ah, but if only humans were logical in their decision making.

Remember cabbage patch kids and beanie babies?
I love beanie babies
I invest based upon "beanie babies" instead of "valuations". :twisted:
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by beardsicles »

cbs2002 wrote: Wed Jul 10, 2024 9:54 am
WhitePuma wrote: Tue Jul 09, 2024 8:10 pm
rkhusky wrote: Tue Jul 09, 2024 7:43 pm Things are worth what people are willing to pay for them. Something is overpriced if no one is willing to pay the price for it.
Ah, but if only humans were logical in their decision making.

Remember cabbage patch kids and beanie babies?
But they were not overvalued when collectors were buying them. They were worth exactly what they paid for them at the time.

SP500 index shares are worth what someone is willing to pay for them. People do mental gymnastics trying to convince other people that such-and-such is actually worth more or less than the price, but at the end of the day, the price is the price.

I don't think what you seek is knowable in any way that will give you a long-term edge. Thousands of people who work full time in the financial industry attempt to game this every day, and the results are the prices we see.

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Re: What would S&P500 be if market valuations returned to average historical level?

Post by HomerJ »

Make changes to your AA based on your personal situation, not what you think the market is likely to do going forward.

Now, that said, market conditions absolutely could affect one's personal situation, so yes, one might make changes near a market top just because one has a lot lore money.

For instance, I hit my "number" thanks to the market run-up, and as the market kept going up, I started moving all the "extra" past my number into money-markets.

Not because I thought the markets were over valued and might crash soon, but because I had "enough", and started building a cash buffer for additonal safety..

AA, for me, is about risk management, not trying to maximize gains..

I've actually built enough of a cash buffer now, that I've stopped moving "extra" money into cash, and I'm just letting stocks ride (although still doing my normal rebalancing with my main portfolio)

We will get what we get. Stock money is long-term money... I'm not worried about any crash in the short-term. I have plenty of short term money to handle any short term spending.
"The best tools available to us are shovels, not scalpels. Don't get carried away." - vanBogle59
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by rockstar »

HomerJ wrote: Wed Jul 10, 2024 12:21 pm Make changes to your AA based on your personal situation, not what you think the market is likely to do going forward.

Now, that said, market conditions absolutely could affect one's personal situation, so yes, one might make changes near a market top just because one has a lot lore money.

For instance, I hit my "number" thanks to the market run-up, and as the market kept going up, I started moving all the "extra" past my number into money-markets.

Not because I thought the markets were over valued and might crash soon, but because I had "enough", and started building a cash buffer for additonal safety..

AA, for me, is about risk management, not trying to maximize gains..

I've actually built enough of a cash buffer now, that I've stopped moving "extra" money into cash, and I'm just letting stocks ride (although still doing my normal rebalancing with my main portfolio)

We will get what we get. Stock money is long-term money... I'm not worried about any crash in the short-term. I have plenty of short term money to handle any short term spending.
I’m a 10% gain away from my number. And I have slowly built up 2x expenses in cash like assets.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by Leesbro63 »

Firemenot wrote: Tue Jul 09, 2024 11:52 am There are a lot of dangerous assumptions in your question. Recently heard Jeremy Siegel say (have heard others say as well) if you take out the top 7 companies or so the rest of the SP500 is valued similar to the rest of the world — that is they trade like value stocks. Those top 7 companies are cash cows. No one is really complaining about foreign stocks being over-priced.

So you really need to decide what you think of those top 7 companies. If you think they are way overvalued then I’m sure there’s a way to underweight them in your portfolio.
I follow Professor Siegel too. He's been right overall. I also watch, for fun, Tom Lee. Tom Lee says the S&P will triple in the next 6 years. Do I think this will happen? No way to know. But the point is that there are good cases to be made that the market is not overvalued. Pick your asset allocation and fasten your seat belt.
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Re: What would S&P500 be if market valuations returned to average historical level?

Post by gougou »

Market is not going to return to average historical levels. Market is either going to overshoot or undershoot. But we don't know how much it's going to overshoot this time. The bull market can continue for years and valuation levels could stay high or go even higher.
The sillier the market’s behavior, the greater the opportunity for the business like investor.
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