Fed Chair Yellen Warns on Stock Valuations

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denovo
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Fed Chair Yellen Warns on Stock Valuations

Post by denovo » Wed May 06, 2015 9:39 pm

On Wednesday, Federal Reserve chair Janet Yellen sparked some selling in the stock market when she remarked at conference that stock prices look “quite high.”

Yellen didn’t specify exactly how she was measuring stock valuations, but it’s easy enough to guess at what she means. A standard way to judge whether the market looks cheap or frothy is to look at the share price of companies on the blue-chip S&P 500 index, relative to their earnings—the P/E ratio.

To smooth out the effect of booms and busts in corporate profits, many market analysts today like to look at a version of P/E called the cyclically adjusted P/E (or CAPE). It uses the current S&P level compared with the average of the past 10 years of earnings. It’s also sometimes called the Shiller P/E, after Nobel Prize-winning Yale economist Robert Shiller, who popularized this method.

Right now, the Shiller P/E is about 27, up from about 15 in the immediate wake of the financial crisis.
http://time.com/money/3849537/yellen-sh ... expensive/


One year P/E looks pretty high too. According to Yahoo Finance P/E (ttm) is 18.

On the other hand, she avoided using the term bubble. However, the last time a Fed Chair made a much stronger warning, Greenspan in 1996: re irrational exuberance, stocks didn't have a major correction for another 3 years.

Any users here who do tactical asset allocation selling stocks? I'll sit tight, my crystal ball is always cloudy.
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Yesterdaysnews
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by Yesterdaysnews » Wed May 06, 2015 10:38 pm

I use a tactical allocation and am still fully invested in stocks. Not buying the fear being pushed.

EarlyStart
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by EarlyStart » Thu May 07, 2015 12:23 am

denovo wrote:
On Wednesday, Federal Reserve chair Janet Yellen sparked some selling in the stock market when she remarked at conference that stock prices look “quite high.”

Yellen didn’t specify exactly how she was measuring stock valuations, but it’s easy enough to guess at what she means. A standard way to judge whether the market looks cheap or frothy is to look at the share price of companies on the blue-chip S&P 500 index, relative to their earnings—the P/E ratio.

To smooth out the effect of booms and busts in corporate profits, many market analysts today like to look at a version of P/E called the cyclically adjusted P/E (or CAPE). It uses the current S&P level compared with the average of the past 10 years of earnings. It’s also sometimes called the Shiller P/E, after Nobel Prize-winning Yale economist Robert Shiller, who popularized this method.

Right now, the Shiller P/E is about 27, up from about 15 in the immediate wake of the financial crisis.
http://time.com/money/3849537/yellen-sh ... expensive/


One year P/E looks pretty high too. According to Yahoo Finance P/E (ttm) is 18.

On the other hand, she avoided using the term bubble. However, the last time a Fed Chair made a much stronger warning, Greenspan in 1996: re irrational exuberance, stocks didn't have a major correction for another 3 years.

Any users here who do tactical asset allocation selling stocks? I'll sit tight, my crystal ball is always cloudy.


Think about the painful irony of Alan Greenspan being referred to for his foresight... If anyone has proven that they have no clue what will/will not bring about malinvestment and recessions, it's him. Now apply to the same logic to Yellen and other central bankers.


I always get a good laugh listening to their statements. I'm with you, sitting tight. I will say though, that if I were to do the "tactical allocation" thing, I sure wouldn't listen to central bankers.

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JoMoney
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by JoMoney » Thu May 07, 2015 4:21 am

This article: http://www.marketwatch.com/story/yellen ... 2015-05-06
Gives a bit more color to the full context of what/where she said it.
“I would highlight that equity market valuations at this point generally are quite high,” Yellen said in a conversation with Christine Lagarde, the managing director of the International Monetary Fund, sponsored by the Institute for New Economic Thinking.

“They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there,” Yellen said.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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JoMoney
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by JoMoney » Thu May 07, 2015 6:25 am

I just watched "Mad Money" Cramer's take on it:
http://finance.yahoo.com/video/cramer-t ... 00039.html
As typical, just more noise, but I did like one comment/question he made:

Is the Fed going to tell you when stocks are cheap?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by Grt2bOutdoors » Thu May 07, 2015 7:56 am

The Fed's mandate is to focus on stable employment and monetary policy.
Listening to Janet Yellen or anyone else for that matter on the direction of the stock market is no different than listening to the shoeshine boy giving you stock picks. Her crystal ball is as cloudy as everyone elses. Heck, she has a hard enough time conveying what is going on in the economy. If you sell now or fail to buy now and your time horizon is 50 years, you may be just missing the "buy of the century" by holding off. Like I said, no one knows the future. Hold an allocation that will let you sleep at night even when the market/economy gets choppy. There is nothing wrong with being conservative, there is something wrong when you resort to market timing on a regular basis.
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by Grt2bOutdoors » Thu May 07, 2015 7:57 am

JoMoney wrote:I just watched "Mad Money" Cramer's take on it:
http://finance.yahoo.com/video/cramer-t ... 00039.html
As typical, just more noise, but I did like one comment/question he made:

Is the Fed going to tell you when stocks are cheap?
Exactly!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by Johno » Thu May 07, 2015 10:02 am

“I would highlight that equity market valuations at this point generally are quite high,” Yellen said in a conversation with Christine Lagarde, the managing director of the International Monetary Fund, sponsored by the Institute for New Economic Thinking.

“They are not so high when you compare the returns on equities to the returns on safe assets like bonds, which are also very low, but there are potential dangers there,” Yellen said.
It seems pretty boilerplate and hard to argue with. Investment assets are expensive by past standards. This is in part specifically due to Fed policy, or at least one (pretty much) openly stated goal of Fed policy in recent years has been to pump up asset prices and they've risen (though not necessarily for that reason or entirely so). That could cause 'dangers', or just benignly low expected returns. However the statement wasn't, and it's hard to imagine a Fed Chairman directly saying, that investors should change their allocations from stocks to something else.

The (in)famous 1996 Greenspan statement about 'irrational exuberance' in the stock market is remembered differently by different people. Some view it as an early warning of the tech bubble. Others (more practically) point out that it was way too soon to have done anyone any good had they heeded it at the time the statement was made. Others see the main issue as that Greenspan didn't heed his own words, believing that different Fed policy might have averted the tech or ultimately 2008 crashes. So what can you practically do with such statements at the time they're made? History suggests, nothing much.

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by denovo » Thu May 07, 2015 10:51 am

JoMoney wrote:I just watched "Mad Money" Cramer's take on it:
http://finance.yahoo.com/video/cramer-t ... 00039.html
As typical, just more noise, but I did like one comment/question he made:

Is the Fed going to tell you when stocks are cheap?
I tried watching Cramer, but clicked out after 1 minute. He's obnoxious enough , but especially with all those special effects and annnoying sounds , it becomes unbearable. :annoyed
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by nedsaid » Thu May 07, 2015 11:02 am

The Fed actions through Quantitative Easing were meant to bring interest rates down and to encourage people to invest in riskier assets. In other words, they were trying to reinflate the stock and real estate markets. This would indirectly stimulate the economy as the "wealth effect" would encourage people to spend. It was also an indirect way to recapitalize the banks, allowing them to earn a bigger spread between loan rates and deposit rates. So evidently what they did might have worked a bit too well.

I know there will be a lot of comparisons to Alan Greenspan's "Irrational Exuberance" comments. It doesn't exactly fit. In 1996, when Greenspan made these comments both the economy and markets were booming. Today, the economy has largely recovered but we certainly are not in an economic boom. The markets boomed though.

As I have posted many times, I don't think the US Stock Market is overvalued but it certainly is not a bargain either. I can certainly excuse people for feeling some nervousness.
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by itstoomuch » Thu May 07, 2015 11:12 am

To Yellin: Resistance is futile. You will be absorbed. :annoyed
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by LateStarter1975 » Thu May 07, 2015 11:28 am

denovo wrote:
JoMoney wrote:I just watched "Mad Money" Cramer's take on it:
http://finance.yahoo.com/video/cramer-t ... 00039.html
As typical, just more noise, but I did like one comment/question he made:

Is the Fed going to tell you when stocks are cheap?
I tried watching Cramer, but clicked out after 1 minute. He's obnoxious enough , but especially with all those special effects and annnoying sounds , it becomes unbearable. :annoyed
+1
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by synpacket » Thu May 07, 2015 11:29 am

Yesterdaysnews wrote:Not buying the fear being pushed.
And it's always fear being pushed. I don't get it, it just looks like market manipulation, but since it's over my head I can't see for what purpose. Then I feel like a conspiracy theorist. But Janet Yellen (and everyone else) knows that if she so much as makes a peep, the market will respond by one or two percent. I can't help but feel that there are people who make a lot of money every time that happens.

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by masteraleph » Thu May 07, 2015 12:06 pm

So on the one hand, they're to some degree high.

On the other hand, let's cherry pick a few dates:

If you had invested in VFINX, Vanguard S&P 500 (investor class), and reinvested dividends, you're up:

73% from Jan 1, 2007, when the Shiller PE ratio was a little higher than today
123% from Jan 1, 2004, when the Shiller PE ratio was a little higher than today
About the same for Jan 1 2002, when the Shiller PE was higher than today (30.28 vs. about 27)
105% from Jan 1 2001, when the Shiller PE was significantly higher today (36 vs about 27)
80% from Jan 1 2000, when it was much higher than today (43 vs 27)
125% from Jan 1 1999, again much higher (40 vs 27)
190% from Jan 1 1998, higher than today (32 vs 27)
287% from Jan 1 1997, a little higher than today (28 vs 27)

(all Shiller PE values from multpl.com)

Note, by the way, that the PE (not PE10) values are much more volatile.

What does that tell us?

Well, first of all, for all of those dates, there's been a real value increase. The lowest, obviously, is from Jan 1 2000- that's only an 80% increase, but prices are up about 36% over that period.

Second of all, S&P PE might be useful in picking up general trends, but it certainly doesn't have specific predictive value.

Third, a relatively high PE10 can still yield good results- Prices are up 46% from 2007, but there's still a pretty nice real yield on stocks from 1997.

Bottom line: if the US economy does well in the next 10 years, the stock market can also do relatively well. If it does poorly, it's likely not to do as well. There will be times when the stock market is lower than it is today, but there's a solid chance it ends up higher than it is today, as well.

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by J295 » Thu May 07, 2015 1:39 pm

Just curious on where he obtained his crystal ball.
Wasn't it just a year a two ago when 100% of the economist were wrong on their prediction on interest rates?

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by HardKnocker » Thu May 07, 2015 2:31 pm

Yellen is correct in her statement.

Valuations are high.
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by Archie Sinclair » Thu May 07, 2015 7:52 pm

nukewerker wrote:
JoMoney wrote:I just watched "Mad Money" Cramer's take on it:
http://finance.yahoo.com/video/cramer-t ... 00039.html
As typical, just more noise, but I did like one comment/question he made:

Is the Fed going to tell you when stocks are cheap?
Janet won't tell you...but this guy will. I swear every time I read this I want to pull all my money from the markets and put my tin foil hat on. Chills.

http://www.usnews.com/news/obama/articl ... -investors
It seems like it was good advice. $10,000 invested in Vanguard Total Stock Market (VTSMX) on March 4, 2009 would be $34,988.20 today.

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PaFromFL
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by PaFromFL » Thu May 07, 2015 9:57 pm

I've been through many bubbles, and this stock market doesn't feel like one to me, particularly since low bond interest rates naturally make stocks attractive at a higher-than-normal P/E. The Fed will raise rates, but probably very slowly and not enough to justify selling my stocks to buy bonds.

However, when the person whose job it is to manipulate the USA financial system makes a negative comment, you have to wonder if it just an innocent observation, or an indication that the Fed is thinking about simultaneously raining on both the stock and bond parades. A large rapid rate increase could do the job, but would make the Fed extremely unpopular.

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by Rx 4 investing » Thu May 07, 2015 11:39 pm

This is not an endorsement for market timing. For those who may subscribe to tactical allocation, perhaps this rule- of- thumb might be of interest. First, recall Mr. Bogle wrote this in one of his classics, Bogle on Mutual Funds:

"Another sort of tactical allocation strategy involves changing the stock / bond ratio based on the relative outlooks for the respective financial markets. But since no one can ever be sure of the future path of the financial markets, the tactics I recommend would place severe restrictions on the extent of the allocation changes. Specifically, I would vary the desired strategic balance by no more than 15 percentage points on either side. A portfolio targeted at 50/50 would never have less than 35% in stocks nor more than 65%."

Since there is a connection between stock earnings and the "outlook" for the economy as Mr. Bogle implies, there is an easy- to- track indicator that can give us hints. I am watching what Ms. Yellen and her Fed committee "does", not what they "say". The yield curve can give us some pretty good signals about when recession might occur and when stocks may turn south.

Every recession over the past 50 years was preceded by the Fed hiking short-term rates enough to "invert" the yield curve. It has happened seven out of seven times. Paraphrasing Cliff Asness of AQR, 'if you can find something in the investing world that happens 2 out of 3 times, it is worth considering.' The most popular way of tracking the yield curve is to monitor the spread between the 3-month T-bill and the 10-year note. The yield curve "inverts" when the yield on the 3-month T bill is higher than the 10- year T-Bond.

Rule of thumb: a recession occurs within several months of yield curve inversion. We can follow the yield curve from the comfort of our own homes. The components of the yield curve ( 3mos & 10 year) can be tracked here:

http://www.treasury.gov/resource-center ... data=yield

As we can tell from the table, it will take quite a few short-term rate increases before short- term rates are equal to the 10 year T-Bond. In the meantime, the majority of us should stick with our "sleep well at night" stock allocations, and ride out the volatility.

FYI...There are many academic papers that can be Googled on this topic, some research actually done by the Fed, that point out the strong connection of the yield curve and economic recession. This is just one of many papers...

http://www.newyorkfed.org/research/curr ... /ci2-7.pdf

"Jaw-boning" like this week's statement by Chair Yellen may be one of the Fed's softer techniques to keep bubbles from blowing, but she needs to actually increase short- term rates enough to flatten the yield curve before I will pay much attention.

Disclaimer: As Buffett has said, " If history all there was to investing, librarians would be millionaires." William Bernstein counsels before deciding on a stock allocation to always ask one's self "how much can I afford to lose?"

Disclosure: I will never be 100% out of stocks, but do subscribe to tactical allocation based on advice from Ben Graham and Mr. Bogle. I am currently 50%-S / 50%-B ( Graham recommend T-A-A in a slightly wider 25% -75% range ).
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by nukewerker » Fri May 08, 2015 4:31 am

Archie Sinclair wrote:
nukewerker wrote:
JoMoney wrote:I just watched "Mad Money" Cramer's take on it:
http://finance.yahoo.com/video/cramer-t ... 00039.html
As typical, just more noise, but I did like one comment/question he made:

Is the Fed going to tell you when stocks are cheap?
Janet won't tell you...but this guy will. I swear every time I read this I want to pull all my money from the markets and put my tin foil hat on. Chills.

http://www.usnews.com/news/obama/articl ... -investors
It seems like it was good advice. $10,000 invested in Vanguard Total Stock Market (VTSMX) on March 4, 2009 would be $34,988.20 today.
Agreed...eerily so.

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by bottlecap » Fri May 08, 2015 8:02 am

Luckily, Yellen's crystal ball is probably cloudier than ours.

JT

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Re: Fed Chair Yellen Warns on Stock Valuations

Post by nedsaid » Fri May 08, 2015 10:11 am

The trouble with bull markets is that they always look expensive. I saw the James Cramer video on this topic and he did a very good job explaining this. He showed how much the US Stock Market went up since Alan Greenspan's "Irrational Exuberance" comments back in 1996 and commented on how much certain bio-tech stocks had gone up since Yellen's comments about overvaluation in that sector. Warren Buffett has also made similar comments.

We got bashed so hard by the 2000-2002 and the 2008-2009 bear markets that we forget what bull markets look like. This is a bull market.
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Re: Fed Chair Yellen Warns on Stock Valuations

Post by LadyGeek » Fri May 08, 2015 12:43 pm

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