WSJ article on overvalue and lower returns

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hoppy08520
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Re: WSJ article on overvalue and lower returns

Post by hoppy08520 » Sat Jul 12, 2014 5:27 pm

WSJ wrote:U.S. stocks are overvalued—and have been for months. That is what six well-known measures of valuation show.

While that doesn't mean a bear market is imminent, there is a high probability that investment returns over the next decade will be below average, according to Yale University economics professor and Nobel laureate Robert Shiller.

Investors shouldn't expect that what has worked for them over the past five years will continue to work in the future.

The gist of this article echoes some of the other recent threads talking about a ~2% large cap US annualized return over the next 10 years or so.

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Taylor Larimore
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Re: WSJ article on overvalue and lower returns

Post by Taylor Larimore » Sat Jul 12, 2014 5:33 pm

Bogleheads:

We must never forget: No one knows the future.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Day9
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Re: WSJ article on overvalue and lower returns

Post by Day9 » Sat Jul 12, 2014 5:37 pm

Counter argument: They aren't overvalued. This is the "new normal". Obama in 2009: "We now know a financial crisis on one country can affect the whole world... Our prosperity must be shared" [among the global wealthy elite]

In this new world of globalization, the foreign rich are waking up to ideas like Modern Portfolio theory and diversification. For example a few years ago Robert Shiller went to advise Scandinavians to diversify since they are immensely overweighed in their local oil. US Large cap stocks are being injected with foreign capital in a new way and this trend is here to stay.
I'm just a fan of the person I got my user name from

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kellyfj
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Re: WSJ article on overvalue and lower returns

Post by kellyfj » Sat Jul 12, 2014 5:54 pm

At a minimum it means it's a good time to check your allocations and rebalance.

Personally though I rebalanced (80/20) yet all new 401k contributions are going to cash until October when QE ends.
The PE10 combined with so many other problems incl. decreasing workforce participation, Europe teetering on recession, mid-terms in October etc.
I just don't see why the stock market is so optimistic (unless it's being held in place by QE).

Right or wrong - It will be a lesson for me either way.

Last time I felt this way - Summer 2007 :-)

-Frank

sambb
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Re: WSJ article on overvalue and lower returns

Post by sambb » Sat Jul 12, 2014 7:31 pm

I am intrigued by all of this. I don't care if investment returns are lower - like 6% instead of 10% --- as long as inflation is 1% instead of 5%.

Isn't the overall measure of return only relevant as its spread over inflation?

This is what I find confusing about asset allocation models. If stocks return lower than average, but inflation is lower than average, then does it really matter?

Of course, worst of all worlds is low returns and high inflation.


Second issue is this - if stock market is overvalued -then, given efficient markets, shouldn't that be already priced into the market?

Johno
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Re: WSJ article on overvalue and lower returns

Post by Johno » Mon Jul 14, 2014 9:12 am

It would probably be better if the term 'overvalued' were de emphasized in favor of 'priced for low expected returns'. 'Overvalued' has a tendency to imply that it can be known when and how the market will return to not being overvalued, and thus selling now (or soon, or some particular time) and buying back later to beat the market. A correct view of efficient markets calls that out as BS (or at least the idea that most people can guess that correctly). However it's a misstatement of efficient market theory to imply you can't make any inference from market prices about *expected* returns.

You obviously can for 'riskless' (ie US treasury) zero coupon bonds. They have a low nominal yield. If you invest you get that low nominal yield, simple as that. Vanguard's junk fund (w/ higher average rating than major junk indices) the (30 day SEC) yield (net of ER) is ~4%, average life ~5-6yrs. The nominal return will be less (over that horizon) because the fund will probably suffer some default losses, but probably not a lot less. So it's not as simple as the treasury but clearly wrong to ignore junk yields in trying to infer junk expected returns. This form of analysis is harder and less certain yet for stocks, but IMO surely still applies to a degree. For example US stocks have outperformed the major junk indices by only around 1% in the 'modern' junk era, so even the 4% on (bit higher grade than index) junk suggests lower than historical expected returns for stocks. And that's another indicator corroborating the ones Hulbert quotes in the WSJ article (PE10, price to sales, price to book, Q) all saying that US stocks are probably priced for low expected returns by historical standards. This is not strange given that baseline riskless returns are so low, and making such a statement does not imply the ability to see the future.

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