Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Dead Man Walking
Posts: 718
Joined: Wed Nov 07, 2007 6:51 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Dead Man Walking » Mon Jul 30, 2018 7:50 pm

Over the last decade interest rates have been very low. Has the stock market ever been stimulated by abnormally low interest rates as it has been over the last decade? Low rates seem to have been a global phenomenon. I ask this question because I don't know if this period is an historical anomaly or if such periods have occurred previously.

DMW

gips
Posts: 475
Joined: Mon May 13, 2013 5:42 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by gips » Mon Jul 30, 2018 8:40 pm

Grt2bOutdoors wrote:
Mon Jul 30, 2018 5:08 pm
gips wrote:
Mon Jul 30, 2018 4:34 pm
fwiw, one of my wall st. ex-colleagues changed his equity allocation to zero based on the current cape ratio. However, there's so much press about poor expected returns, he's thinking it may be time to get back in :wink:
We know how precise and accurate Wall Street has been with predictions.
well, his job isn't to make wall st predictions but he's done a better job than most in shepherding his assets. he has a very sophisticated understanding of financial markets/finance and economics and he looks at things through a different lens.

selters
Posts: 608
Joined: Thu Feb 27, 2014 9:26 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by selters » Tue Jul 31, 2018 2:35 am

deltaneutral83 wrote:
Mon Jul 30, 2018 3:34 pm
5% nominal for the next ten years on the S&P would result in the worst rolling 30's for nominal (or real) since before the reliable data was available.
But rolling 35 year returns would be just fine. The late 90s had extraordinarily high returns, which ate up some future returns.

asif408
Posts: 1478
Joined: Sun Mar 02, 2014 8:34 am
Location: Florida

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by asif408 » Tue Jul 31, 2018 7:42 am

Dead Man Walking wrote:
Mon Jul 30, 2018 7:50 pm
Over the last decade interest rates have been very low. Has the stock market ever been stimulated by abnormally low interest rates as it has been over the last decade? Low rates seem to have been a global phenomenon. I ask this question because I don't know if this period is an historical anomaly or if such periods have occurred previously.

DMW
I'm not sure I have a good answer, but at least in the US the 3 month T-bill from 1934-1947 was under 0.5%: http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html. That was longer than the current stretch. During that time the Shiller CAPE was between 8 and 22.

I'm not sure about outside the US, would be interesting to know.

User avatar
Toons
Posts: 13016
Joined: Fri Nov 21, 2008 10:20 am
Location: Hills of Tennessee

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Toons » Tue Jul 31, 2018 8:43 am

Dottie57 wrote:
Mon Jul 30, 2018 7:14 pm
gmaynardkrebs wrote:
Mon Jul 30, 2018 5:19 pm
Toons wrote:
Mon Jul 30, 2018 5:11 pm
Overvalued.
Undervalued,
Makes no difference.
Keep Investing.

:happy
And the effect will be...what?
You will own more shares.
Thank You
You Are On Your Way To Wealth Creation :happy :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

User avatar
El Greco
Posts: 305
Joined: Tue Aug 23, 2016 2:21 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by El Greco » Tue Jul 31, 2018 9:35 am

I would comment, but my crystal ball is in the shop being polished. :P

mbasherp
Posts: 121
Joined: Mon Jun 26, 2017 8:48 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by mbasherp » Tue Jul 31, 2018 9:57 am

I use 5% annual as my own estimate for the next 30+ years. Why? It’s a nice moderate number which doesn’t get me too hyped with expectation but still represents significant compounding over time. Doesn’t matter if I’m right or not; I don’t base my savings/investment off of expected returns. I base it off available funds.

The useless contrarian in me is beginning to wonder how different reality will be from expectation since it seems almost everyone is calling for low returns going forward. What if 20 years from now, the narrative of these days is that we were all gun shy after two huge financial crises in a row (2000/2008), pretended that a bear market didn’t happen (2016) and kept waiting for the other shoe to drop for far too long? It’s just as likely, in my opinion.

GAAP
Posts: 633
Joined: Fri Apr 08, 2016 12:41 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by GAAP » Tue Jul 31, 2018 11:38 am

I do use Shiller PE for estimating purposes. I am quite happy if it underestimates future results -- my portfolio will "out-perform". The other way around is not so good...
Notes: For the real-time analysis, the regression coefficients are determined recursively, starting with 10-year trailing annualized returns from January 1901–December 1959 data and re-estimating the regression coefficients with the addition of data for each month thereafter.
This strikes me as a real pain to use for my purposes. It also sounds like a curve-fitting exercise that may or may not provide much value. If I really wanted to do it, I could probably create a regression formula that exactly matched past results -- and would tell me nothing reliable for planning. Shiller PE is rough, but that's all I need.

User avatar
nedsaid
Posts: 10500
Joined: Fri Nov 23, 2012 12:33 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by nedsaid » Tue Jul 31, 2018 11:47 am

Larry Swedroe sent me personal messages regarding CAPE and current valuations. He was responding to comments that I made on the forum. Here are excerpts from our exchange, this might add to the discussion here.

Larry Swedroe said: The research shows it (CAPE or PE 10) is about as good a predictor of longer term returns as we have, but it still only explains about 40% of future 10 year returns (changing ERP explains most of rest, and that of course is not predictable).

But we do know that higher CAPE leads to lower mean return, lower best return and worse worst return, monotonically and vice versa.

Note we have also seen incredible rise in profit margins and capital's share vs labor share of GNP move in favor of capital, and that is one thing that does tend to mean revert---so at least is warning.

And of course the tax cut led to huge increase in earnings, helping to bring down the valuations-

So it's a provider of USEFUL information, but still wide dispersion of returns possible, which is why one runs MCS
Nedsaid said:
In regards to your comments about valuations, we are largely in agreement. Though P/E ratios are lower, I noted that recent earnings have been very strong. I have commented that both earnings growth and optimistic earnings forecasts may not be sustainable. The counterargument is that if economic growth is 3% plus going forward then market optimism is warranted. We will see. Valuations are in the eye of the beholder but I just could not help but notice P/E contraction, particularly with trailing P/E ratios.
Nedsaid said:
I am also reacting to the fact that PE10 is so high compared to very recent market PE ratios both forward and trailing PEs. My comment is that something is amiss here.

The market in my mind is getting closer and closer to where I would put an outright "buy" on it. PEs have been coming down because of recently very strong earnings but also because of rising short term interest rates. I am beginning to believe that the market is no longer expensive. Just couldn't believe the PE ratios of Value funds, anywhere from 13 to 15. Forward PE's of such funds had been 17 or 18 for quite some time.

I don't buy the assertion that the US Market is at historically high valuations. Not yet ready to call the US market cheap but it certainly isn't expensive. I would argue that the economy was kept below its potential by US Government policies, mainly overregulation. We had the "new normal" of 2% and now is looks like sustainable economic growth going forward will be 3%. This is huge. We thought the market was expensive but that was because of an underperforming economy and very low interest rates.
Nedsaid said:
Yes 3% growth is about average but is a big boost from the "new normal" 2% growth. The US Economy is so much bigger now than even the 1980's, as the economy gets bigger and bigger, it is harder to sustain faster rates of growth over time.
Larry Swedroe said:
basically agree but 3% gnp growth is only about historical average, nothing special. Keep that in mind. And while valuations coming down still relatively high and margins are way above average, and not likely sustainable, but possible of course
Larry Swedroe said:And not surprised most people have not heard of CAPE 10, and it has VERY WIDE dispersion of outcomes as I have written about, but 40% explanatory power is a lot, and certainly contains valuable information when you see those monotonic shifts in best, means and medians. Only a fool would ignore IMO

Be very careful with the more current valuations, think making mistake of thinking all things equal. Both margins and profits as % of GNP are at records and with low UE (unemployment) that historically and logically leads to shift of percentages to favor labor, not capital. With that said, I do believe there is logical reason for the figures to have risen due to capital becoming more and more a percent of GNP itself and labor less. And this is being virtually totally ignored. But still .... Of course my crystal ball cloudy as always

Note valuations no where near "buy" which would be at say low double digits or high single digits like in 09. And as you note value stocks should be say 12 for large and 10 for small, so still very high
A fool and his money are good for business.

Grt2bOutdoors
Posts: 19322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Grt2bOutdoors » Tue Jul 31, 2018 12:42 pm

Morgan Stanley did not get the Vanguard memo.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

KlangFool
Posts: 10424
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool » Tue Jul 31, 2018 2:52 pm

mbasherp wrote:
Tue Jul 31, 2018 9:57 am
I use 5% annual as my own estimate for the next 30+ years. Why? It’s a nice moderate number which doesn’t get me too hyped with expectation but still represents significant compounding over time. Doesn’t matter if I’m right or not; I don’t base my savings/investment off of expected returns. I base it off available funds.

The useless contrarian in me is beginning to wonder how different reality will be from expectation since it seems almost everyone is calling for low returns going forward. What if 20 years from now, the narrative of these days is that we were all gun shy after two huge financial crises in a row (2000/2008), pretended that a bear market didn’t happen (2016) and kept waiting for the other shoe to drop for far too long? It’s just as likely, in my opinion.
mbasherp,

5% real return (after inflation adjustment) or 5% nominal (before inflation adjustment)?

I use a 5% nominal for my planning purposes.

KlangFool

mbasherp
Posts: 121
Joined: Mon Jun 26, 2017 8:48 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by mbasherp » Wed Aug 01, 2018 7:36 am

KlangFool wrote:
Tue Jul 31, 2018 2:52 pm

mbasherp,

5% real return (after inflation adjustment) or 5% nominal (before inflation adjustment)?

I use a 5% nominal for my planning purposes.

KlangFool
5% nominal. But again, it doesn't really matter beyond generating mostly useless spreadsheets far into the future. We can all discuss predictions as much as we want about what the future will hold, but it'll only be one thing when it arrives AND we won't know for sure whatsoever in advance. So I take my own guesstimates with a grain of salt and I certainly don't change my contributions based on what I think investment returns might be.

KlangFool
Posts: 10424
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool » Wed Aug 01, 2018 7:51 am

mbasherp wrote:
Wed Aug 01, 2018 7:36 am
KlangFool wrote:
Tue Jul 31, 2018 2:52 pm

mbasherp,

5% real return (after inflation adjustment) or 5% nominal (before inflation adjustment)?

I use a 5% nominal for my planning purposes.

KlangFool
5% nominal. But again, it doesn't really matter beyond generating mostly useless spreadsheets far into the future. We can all discuss predictions as much as we want about what the future will hold, but it'll only be one thing when it arrives AND we won't know for sure whatsoever in advance. So I take my own guesstimates with a grain of salt and I certainly don't change my contributions based on what I think investment returns might be.
mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool

GAAP
Posts: 633
Joined: Fri Apr 08, 2016 12:41 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by GAAP » Wed Aug 01, 2018 9:23 am

KlangFool wrote:
Wed Aug 01, 2018 7:51 am
mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?

KlangFool
Posts: 10424
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool » Wed Aug 01, 2018 9:34 am

GAAP wrote:
Wed Aug 01, 2018 9:23 am
KlangFool wrote:
Wed Aug 01, 2018 7:51 am
mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
GAAP,

1) None of the above. I just assume that for a 61/39 to 60/40 portfolio, it will average about 5% nominal over the next 3 to 4 years. If not, I will work one more year if I can. Or else, I have a plan B, C, and D.

2) I save 1 year of expense every year and my portfolio is about 20X now. So, I do not need to worry about the return that much.

KlangFool

2015
Posts: 2092
Joined: Mon Feb 10, 2014 2:32 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by 2015 » Wed Aug 01, 2018 12:02 pm

HomerJ wrote:
Mon Jul 30, 2018 3:29 pm
vineviz wrote:
Mon Jul 30, 2018 3:18 pm
WanderingDoc wrote:
Mon Jul 30, 2018 3:12 pm
vineviz wrote:
Mon Jul 30, 2018 2:24 pm
WanderingDoc wrote:
Mon Jul 30, 2018 2:20 pm
People come up with all sorts of "models" to make themselves feel better, it helps them sleep better at night. That is human nature. Similar to changing how the way unemployment was calculated/reported, changing how quarterly earnings are reported, changing how CAPE is reported, changing how the trade deficit is reported, changing how the federal balance sheet is reported, etc. Of course someone wants to feel better about a situation. We simply convince ourselves that it isn't as "bad" as we think.
Also, some people are inherently intellectually curious and seek to deepen their understanding of how the world works.
Not when all of it goes in the exact same direction.
Like I said , some of us are just interested in getting smarter.

If that doesn’t interest you, a forum called “Investing - Theory” probably isn’t going to excite you very much.
You may not actually be getting smarter.
Well said.

I do compliment Vanguard on this piece of marketing disguised as "information". What makes this kind of financial noise dangerous isn't the noise itself, but the propensity of "students of investing" to do stupid things with it (that is, take counterproductive actions). One prediction that has remained unchanged throughout history is that "students of investing" are their own worst enemy.

Random Walker
Posts: 3193
Joined: Fri Feb 23, 2007 8:21 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Random Walker » Fri Aug 03, 2018 5:20 pm

https://alphaarchitect.com/2018/08/03/a ... ape-ratio/

Guys at alpha Architect interviewed one of the authors in this article here.

Dave

Grt2bOutdoors
Posts: 19322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Grt2bOutdoors » Fri Aug 03, 2018 7:17 pm

KlangFool wrote:
Wed Aug 01, 2018 9:34 am
GAAP wrote:
Wed Aug 01, 2018 9:23 am
KlangFool wrote:
Wed Aug 01, 2018 7:51 am
mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
GAAP,

1) None of the above. I just assume that for a 61/39 to 60/40 portfolio, it will average about 5% nominal over the next 3 to 4 years. If not, I will work one more year if I can. Or else, I have a plan B, C, and D.

2) I save 1 year of expense every year and my portfolio is about 20X now. So, I do not need to worry about the return that much.

KlangFool
You saved 20x, in cash? Or bonds only? If in equities it is at risk of permanent loss.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

KlangFool
Posts: 10424
Joined: Sat Oct 11, 2008 12:35 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool » Fri Aug 03, 2018 7:23 pm

Grt2bOutdoors wrote:
Fri Aug 03, 2018 7:17 pm
KlangFool wrote:
Wed Aug 01, 2018 9:34 am
GAAP wrote:
Wed Aug 01, 2018 9:23 am
KlangFool wrote:
Wed Aug 01, 2018 7:51 am
mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
GAAP,

1) None of the above. I just assume that for a 61/39 to 60/40 portfolio, it will average about 5% nominal over the next 3 to 4 years. If not, I will work one more year if I can. Or else, I have a plan B, C, and D.

2) I save 1 year of expense every year and my portfolio is about 20X now. So, I do not need to worry about the return that much.

KlangFool
You saved 20x, in cash? Or bonds only? If in equities it is at risk of permanent loss.
Grt2bOutdoors,

1) 1 year of emergency fund plus a half year of college expense.

2) 61/39 -> 61% stock 39% fixed income

3) I can survive about 5 years of the downturn without a permanent loss.

4) After 5 years, money is no longer the biggest problem.

KlangFool

stlutz
Posts: 4784
Joined: Fri Jan 02, 2009 1:08 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by stlutz » Fri Aug 03, 2018 7:55 pm

I know if there is a CAPE thread everybody has to go to their corners, but does anybody have any thoughts on the "improvements" Vanguard has suggested to the model?

Namely that one should incorporate: a) real bond yields, b) expected inflation rates, and c) financial volatility into their forecast of what CAPE will be in the future?

One common way to look at estimating long-term returns is to consider:

1) the current yield
2) estimated earnings growth
3) future market multiples vs. current market multiples.

Their proposal only comments on #3. Do people think on a conceptual level that the factors they suggest considering are better than simply assuming mean reversion or no change (the most common approaches that are discussed here)?

User avatar
nedsaid
Posts: 10500
Joined: Fri Nov 23, 2012 12:33 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by nedsaid » Sat Aug 04, 2018 12:34 pm

stlutz wrote:
Fri Aug 03, 2018 7:55 pm
I know if there is a CAPE thread everybody has to go to their corners, but does anybody have any thoughts on the "improvements" Vanguard has suggested to the model?

Namely that one should incorporate: a) real bond yields, b) expected inflation rates, and c) financial volatility into their forecast of what CAPE will be in the future?

One common way to look at estimating long-term returns is to consider:

1) the current yield
2) estimated earnings growth
3) future market multiples vs. current market multiples.

Their proposal only comments on #3. Do people think on a conceptual level that the factors they suggest considering are better than simply assuming mean reversion or no change (the most common approaches that are discussed here)?
Markets are a many sided thing. For stocks, it is mostly about earnings and expectations of earnings. Of course other things come into play here: the state of the economy, the level of interest rates, the emotion of the investing public, etc. You throw in human emotion, it makes all of this hard to predict. Markets are very complex and even the best of models have their inadequacies. The one thing you don't expect to happen does happen and at the wrong possible time. No matter how smart you are there are things you cannot anticipate.

The definition of earnings by the accountants has gotten more conservative over the time. Two key examples are treatment of stock options and the treatment of goodwill. Perhaps a market P/E of 16 in 1970 would be the equivalent of 20 today. Also as companies are becoming more dependent upon intangible assets, the accountants have a harder and harder time putting an accurate value on the company. Book value as a measure is becoming increasingly irrelevant. So the valuation yardsticks we use are changing as well. Comparing book value and P/E with historical numbers is becoming harder and harder. With these arguments in mind, you could say earnings are vastly understated for some companies. How do you record on the books vast increases in the value of intangible assets, this is a judgment of the markets and not the accountants. Shouldn't a vast increase in stock price somehow be reflected in earnings?

What I am saying is that the measuring sticks are flawed because real life is very complicated. How to you define earnings? How do you define book value? I am sure there are many other theoretical questions that could be raised about accounting standards. Point is that someone has to make a judgment and those judgments are imperfect. So the collective wisdom of the markets makes up for, or tries to make up for, the limitations of accounting.

This is why it is so darned hard to determine whether markets are expensive or cheap. To a large degree, valuation is in the eye of the beholder. We pretend this is more objective than it really is. We are really dealing with informed and educated judgments and guesses and not with precise numbers.
A fool and his money are good for business.

GAAP
Posts: 633
Joined: Fri Apr 08, 2016 12:41 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by GAAP » Sun Aug 05, 2018 5:20 pm

stlutz wrote:
Fri Aug 03, 2018 7:55 pm
I know if there is a CAPE thread everybody has to go to their corners, but does anybody have any thoughts on the "improvements" Vanguard has suggested to the model?

Namely that one should incorporate: a) real bond yields, b) expected inflation rates, and c) financial volatility into their forecast of what CAPE will be in the future?

One common way to look at estimating long-term returns is to consider:

1) the current yield
2) estimated earnings growth
3) future market multiples vs. current market multiples.

Their proposal only comments on #3. Do people think on a conceptual level that the factors they suggest considering are better than simply assuming mean reversion or no change (the most common approaches that are discussed here)?
That depends on how you define "better". I have no doubt that you could build an equation that better fits the historical data. Jumping from there to saying it makes a better projection for the future is something else entirely.

Adding multiple terms to an equation also adds multiple factors to get wrong and multiple ways to change the end result. #2 has the extra disadvantage of being an estimate -- meaning that the final estimated result is potentially determined by a prior estimated input. That compounded error is one reason I prefer to use a single real number earnings estimate instead of nominal earnings and inflation.

I'm quite happy with an estimate that works in my favor -- and underestimating actual returns does just that. I like positive surprises, negative ones not so much.

AlphaLess
Posts: 841
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess » Sun Aug 05, 2018 5:51 pm

vineviz wrote:
Mon Jul 30, 2018 6:43 am
Vanguard has an article on their website summarizing their recent paper, Improving U.S. Stock Return Forecasts: A "Fair-Value" CAPE Approach, published in the Winter 2018 issue of The Journal of Portfolio Management.
At the end of 2017, the Shiller CAPE (cyclically adjusted price to earnings) ratio was flirting with all-time highs, surpassed only by the peaks that preceded the collapse of the dotcom bubble. It stood at about 33; its historical average is about 16. A reversion to the ratio's long-term average would bode ill for future stock returns.

Vanguard's "fair-value" CAPE ratio paints a less alarming picture, suggesting that valuations are indeed high but not in the "bubble" territory implied by the conventional CAPE. We expect the returns of U.S. stocks to fall below their historical averages over the next ten years. The most likely outcome, according to our projections, is annualized returns of 3%–5% for the coming decade.
In short, Vanguard proposes an "enhancement to standard CAPE-based forecasts that conditions mean reversion in the CAPE ratio on real (not nominal) bond yields, expected inflation rates, and financial volatility in a VAR model".
There are two ways to get poor returns in the next 10 years (as that is what CAPE is predicting):
- massive crash (followed by recovery),
- low but steady returns.

I would argue that, for long term investors in the accumulation stage, that second scenario is probably worse.

In addition, this study could also be classified under the category, 'Yet another overfitted research'.
"You can get more with a kind word and a gun than with just a kind word." George Washington

AlphaLess
Posts: 841
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess » Sun Aug 05, 2018 5:55 pm

vineviz wrote:
Mon Jul 30, 2018 10:41 am
One possible action you could take is to start saving more money if your current retirement plan is based on an assumption of 10% or 12% stock returns over the next decade.

Don't laugh: there are people doing this.
Upvote * 100.

Also, all those 'safe' withdrawal rate models need to be adjusted for low return for the next 10-20 years.

Withdrawing 3.5% might be too much in the next 20 years.
"You can get more with a kind word and a gun than with just a kind word." George Washington

AlphaLess
Posts: 841
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess » Sun Aug 05, 2018 5:57 pm

El Greco wrote:
Tue Jul 31, 2018 9:35 am
I would comment, but my crystal ball is in the shop being polished. :P
You are lucky. Mine got shattered a long time ago.
"You can get more with a kind word and a gun than with just a kind word." George Washington

AlphaLess
Posts: 841
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess » Sun Aug 05, 2018 6:03 pm

Grt2bOutdoors wrote:
Tue Jul 31, 2018 12:42 pm
Morgan Stanley did not get the Vanguard memo.
What makes you say that?
Or, more precisely, why would you think that Morgan Stanley is subscribed to Vanguards public service announcements?
"You can get more with a kind word and a gun than with just a kind word." George Washington

User avatar
corn18
Posts: 1006
Joined: Fri May 22, 2015 6:24 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by corn18 » Sun Aug 05, 2018 6:37 pm

Yeah, this time it's different.

david1082b
Posts: 371
Joined: Fri Jun 09, 2017 12:35 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by david1082b » Sun Aug 05, 2018 8:19 pm

corn18 wrote:
Sun Aug 05, 2018 6:37 pm
Yeah, this time it's different.
Current S&P 500 CAPE is 32.67, and looking at early the summer of 1929 and summer of 1997 we can see very different returns for the next few years from the same numbers. So yes in the past it was different when there was a similar runup to such a high-looking level. Summer of 1929 to summer of 1932 saw minus 80% return or so, 1997 to 2000 saw 60% return. The ten-year returns were very different too, 1929-1939 saw no return while 1997 to 2007 saw a doubling. "It's always different" is more accurate than "this time is different". Even moderate CAPE numbers have resulted in bad performance over certain time-spans. July 1927 saw a CAPE of 15.81, not a number to cause concern, but by July 1932 the total return had been minus 44%, because the Great Depression occured. Economic situations and investor sentiment play a huge role in sequence of returns. October 1987 saw a crash from a moderate CAPE number too. 1997 to early 2009 saw no return of course, but that is what can happen from even average CAPE numbers. This just shows that risk can appear at any time.

Data sources:

https://dqydj.com/sp-500-return-calculator/
http://www.multpl.com/shiller-pe/table?f=m
Last edited by david1082b on Sun Aug 05, 2018 8:25 pm, edited 1 time in total.

User avatar
corn18
Posts: 1006
Joined: Fri May 22, 2015 6:24 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by corn18 » Sun Aug 05, 2018 8:25 pm

david1082b wrote:
Sun Aug 05, 2018 8:19 pm
corn18 wrote:
Sun Aug 05, 2018 6:37 pm
Yeah, this time it's different.
Current S&P 500 CAPE is 32.67, and looking at early the summer of 1929 and summer of 1997 we can see very different returns for the next few years from the same numbers. So yes in the past it was different when there was a similar runup to such a high-looking level. Summer of 1929 to summer of 1932 saw minus 80% return or so, 1997 to 2000 saw 60% return. The ten-year returns were very different too, 1929-1939 saw no return while 1997 to 2007 saw a doubling. "It's always different" is more accurate than "this time is different". Even moderate CAPE numbers have resulted in bad performance over certain time-spans. July 1927 saw a CAPE of 15.81, not a number to cause concern, but by July 1932 the total return had been minus 44%, because the Great Depression occured. Economic situations and investor sentiment play a huge role in sequence of returns. October 1987 saw a crash from a moderate CAPE number too. 2007 to early 2009 saw no return of course, but that is what can happen from even average CAPE numbers. This just shows that risk can appear at any time.

Data sources:

https://dqydj.com/sp-500-return-calculator/
http://www.multpl.com/shiller-pe/table?f=m
Sure. And past performance is a good indicator of future returns. We sure do a lot of yammering on on BH.org about how to predict the future when nobody knows nuthin'.

Image

Grt2bOutdoors
Posts: 19322
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Grt2bOutdoors » Sun Aug 05, 2018 8:33 pm

AlphaLess wrote:
Sun Aug 05, 2018 6:03 pm
Grt2bOutdoors wrote:
Tue Jul 31, 2018 12:42 pm
Morgan Stanley did not get the Vanguard memo.
What makes you say that?
Or, more precisely, why would you think that Morgan Stanley is subscribed to Vanguards public service announcements?
It’s a joke. But Morgan Stanley should read what the competition is saying/doing, it’s smart business sense to know what the others are doing.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

AlphaLess
Posts: 841
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess » Sun Aug 05, 2018 8:58 pm

corn18 wrote:
Sun Aug 05, 2018 8:25 pm
Image
Your chart is very educational.

What it is saying is that future returns will be lousy, on average, with high volatility.
Also, the fact that 3-year returns can be so positive in that little "YES" cluster simply pushes you to higher valuations.
The regression line in that scatter is clearly statistically significantly negatively sloped.
So: higher ShillerPE => lower future returns.
"You can get more with a kind word and a gun than with just a kind word." George Washington

marcopolo
Posts: 1212
Joined: Sat Dec 03, 2016 10:22 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by marcopolo » Sun Aug 05, 2018 9:16 pm

AlphaLess wrote:
Sun Aug 05, 2018 8:58 pm
corn18 wrote:
Sun Aug 05, 2018 8:25 pm
Image
Your chart is very educational.

What it is saying is that future returns will be lousy, on average, with high volatility.
Also, the fact that 3-year returns can be so positive in that little "YES" cluster simply pushes you to higher valuations.
The regression line in that scatter is clearly statistically significantly negatively sloped.
So: higher ShillerPE => lower future returns.
I would caution against drawing too many conclusions from such small data sets.
Based on this chart, One could just as reasonably conclude that the risk of large losses (>25% loss), and volitility is less for CAPE > 35 than it is for CAPE between 20 and 30.

To paraphrase, "if you torture the data enough, it will confess to anything you want"
Once in a while you get shown the light, in the strangest of places if you look at it right.

am
Posts: 2777
Joined: Sun Sep 30, 2007 9:55 am

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by am » Sun Aug 05, 2018 9:23 pm

How is this actionable? Should we save more, reduce/increase stock allocation, invest in something else?

AlphaLess
Posts: 841
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky
Contact:

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess » Sun Aug 05, 2018 9:50 pm

am wrote:
Sun Aug 05, 2018 9:23 pm
How is this actionable? Should we save more, reduce/increase stock allocation, invest in something else?
Exactly: how is this actionable.

I think - and take it with a grain of salt - the only actionable part here is that if you are retiring now, or plan to retire in the future, your realistic sustainable withdrawal rates are LOWER when Shiller PE is higher.

To make it a bit more actionable: what should my withdrawal rate be, given the CURRENT macroeconomic environment, would a better solution. But putting an actual number is probably harder to do.
"You can get more with a kind word and a gun than with just a kind word." George Washington

User avatar
vineviz
Posts: 2062
Joined: Tue May 15, 2018 1:55 pm

Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by vineviz » Sun Aug 05, 2018 10:36 pm

corn18 wrote:
Sun Aug 05, 2018 8:25 pm
david1082b wrote:
Sun Aug 05, 2018 8:19 pm
corn18 wrote:
Sun Aug 05, 2018 6:37 pm
Yeah, this time it's different.
Current S&P 500 CAPE is 32.67, and looking at early the summer of 1929 and summer of 1997 we can see very different returns for the next few years from the same numbers. So yes in the past it was different when there was a similar runup to such a high-looking level. Summer of 1929 to summer of 1932 saw minus 80% return or so, 1997 to 2000 saw 60% return. The ten-year returns were very different too, 1929-1939 saw no return while 1997 to 2007 saw a doubling. "It's always different" is more accurate than "this time is different". Even moderate CAPE numbers have resulted in bad performance over certain time-spans. July 1927 saw a CAPE of 15.81, not a number to cause concern, but by July 1932 the total return had been minus 44%, because the Great Depression occured. Economic situations and investor sentiment play a huge role in sequence of returns. October 1987 saw a crash from a moderate CAPE number too. 2007 to early 2009 saw no return of course, but that is what can happen from even average CAPE numbers. This just shows that risk can appear at any time.

Data sources:

https://dqydj.com/sp-500-return-calculator/
http://www.multpl.com/shiller-pe/table?f=m
Sure. And past performance is a good indicator of future returns. We sure do a lot of yammering on on BH.org about how to predict the future when nobody knows nuthin'.

Image
The article, FWIW, is notable precisely because Vanguard has already figured out a solution to the problem your chart purports to illustrate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Post Reply