Any metrics that say US Stocks are *NOT* expensive?

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BuyAndHoldOn
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Any metrics that say US Stocks are *NOT* expensive?

Post by BuyAndHoldOn » Mon Aug 27, 2018 11:28 am

I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?

I am not trying to be sarcastic. Just curious is all.


--> It is harder to stay the course with valuation signals though, I must admit. My tinkering - should there be any - would not be to *sell*, but rather to *not buy* more US equities until valuations calm down. (What if they never really do/did? And what metrics would I use?) --> Even then that doesn't appeal to me because I would need a better alternative, and I already invest heavily in Non-US equities (that's been fun the last few years, right everyone :happy ). I.e., I use approximately global market cap with a slight overweight to EM.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by MotoTrojan » Mon Aug 27, 2018 11:31 am

Forward S&P500 price/earnings look great.

alex_686
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by alex_686 » Mon Aug 27, 2018 11:45 am

BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.
First, what do you mean by expensive? Do you mean overvalued? If so, scratch all of the above. None of them were designed for this purpose nor do that have predictive power in this regard. You can use them as relative measures. CAPE is high against metric X, ergo the market is overvalued. But what relative measure to you pick?

Which is where we can get into some fun analysis. Long term bond rates are low so, rationally, P/E measures (like CAPE) should be high. Since expected risk is low, ERP should be low and P/E should be high. Then the next step is to figure out what long term bonds rates will be, long term stock growth, and risk and see if those are reflected in the market.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by Phineas J. Whoopee » Mon Aug 27, 2018 11:52 am

BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading ...
What do you keep reading, who writes it, are they different people or the same ones, and why do you keep reading it?

PJW

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by KlangFool » Mon Aug 27, 2018 11:56 am

BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?

I am not trying to be sarcastic. Just curious is all.


--> It is harder to stay the course with valuation signals though, I must admit. My tinkering - should there be any - would not be to *sell*, but rather to *not buy* more US equities until valuations calm down. (What if they never really do/did? And what metrics would I use?) --> Even then that doesn't appeal to me because I would need a better alternative, and I already invest heavily in Non-US equities (that's been fun the last few years, right everyone :happy ). I.e., I use approximately global market cap with a slight overweight to EM.
BuyAndHoldOn,

Why do this matters unless you are 100% US stock? Or, 100% stock?

<<I am not trying to be sarcastic. Just curious is all. >>

Same here. If someone is asking this question, the person is usually 100/0 in their AA. And, if the person is 100/0, that person needs to ask themselves a simple question why are they using this asset allocation? With this AA, you will buy the stock even if they are over-valued. And, if this is a concern for you, perhaps an AA of 70/30 makes a lot more sense.

I am 60/40. I do not have to buy over-valued stock.

KlangFool

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BuyAndHoldOn
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by BuyAndHoldOn » Mon Aug 27, 2018 12:03 pm

MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
Thanks!
alex_686 wrote:
Mon Aug 27, 2018 11:45 am
BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.
First, what do you mean by expensive? Do you mean overvalued? If so, scratch all of the above. None of them were designed for this purpose nor do that have predictive power in this regard. You can use them as relative measures. CAPE is high against metric X, ergo the market is overvalued. But what relative measure to you pick?

Which is where we can get into some fun analysis. Long term bond rates are low so, rationally, P/E measures (like CAPE) should be high. Since expected risk is low, ERP should be low and P/E should be high. Then the next step is to figure out what long term bonds rates will be, long term stock growth, and risk and see if those are reflected in the market.
I have concerns about [the potential or actual] OverValuation of US Equities. "Concerns" might be an overstatement as I have a long investing horizon and don't invest only in US Stocks.

Phineas J. Whoopee wrote:
Mon Aug 27, 2018 11:52 am
BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading ...
What do you keep reading, who writes it, are they different people or the same ones, and why do you keep reading it?

PJW
"Reading" is a summary for media consumption. I read some articles, but I primarily listen to a lot of Bloomberg Podcasts; Meb Faber's podcast (he's been down on US equities for a while, longer-term); JP Morgan has some interesting podcasts: I follow a lot of finance-related media. Not really for investing purposes, although you can learn of some interesting market developments if you feel like being opportunistic [in some cases; and for better-or-worse].

Some references for valuation can be found at:
https://www.starcapital.de/en/research/ ... valuation/
https://interactive.researchaffiliates. ... ms=NOMINAL

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by MotoTrojan » Mon Aug 27, 2018 12:11 pm

KlangFool wrote:
Mon Aug 27, 2018 11:56 am
BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?

I am not trying to be sarcastic. Just curious is all.


--> It is harder to stay the course with valuation signals though, I must admit. My tinkering - should there be any - would not be to *sell*, but rather to *not buy* more US equities until valuations calm down. (What if they never really do/did? And what metrics would I use?) --> Even then that doesn't appeal to me because I would need a better alternative, and I already invest heavily in Non-US equities (that's been fun the last few years, right everyone :happy ). I.e., I use approximately global market cap with a slight overweight to EM.
BuyAndHoldOn,

Why do this matters unless you are 100% US stock? Or, 100% stock?

<<I am not trying to be sarcastic. Just curious is all. >>

Same here. If someone is asking this question, the person is usually 100/0 in their AA. And, if the person is 100/0, that person needs to ask themselves a simple question why are they using this asset allocation? With this AA, you will buy the stock even if they are over-valued. And, if this is a concern for you, perhaps an AA of 70/30 makes a lot more sense.

I am 60/40. I do not have to buy over-valued stock.

KlangFool
KlangFool, while you may not be exposed to as much downside risk, what about a 60/40 allocation keeps you from buying overvalued (if that is such a thing) stocks? If the US stock market climbs at a hyperbolic rate, will you not still be buying per your AA?

I am 100/0 equities and 75% in the US (with a small-value tilt). Not worried.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by marcopolo » Mon Aug 27, 2018 12:11 pm

BuyAndHoldOn wrote:
Mon Aug 27, 2018 12:03 pm

"Reading" is a summary for media consumption. I read some articles, but I primarily listen to a lot of Bloomberg Podcasts; Meb Faber's podcast (he's been down on US equities for a while, longer-term); JP Morgan has some interesting podcasts: I follow a lot of finance-related media. Not really for investing purposes, although you can learn of some interesting market developments if you feel like being opportunistic [in some cases; and for better-or-worse].

Some references for valuation can be found at:
https://www.starcapital.de/en/research/ ... valuation/
https://interactive.researchaffiliates. ... ms=NOMINAL
How long have these people in the media that you are consuming been consistently out performing their relative benchmark indexes?

I suspect even they will tell you that it is mostly entertainment, not information, and certainly not knowledge.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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patrick013
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by patrick013 » Mon Aug 27, 2018 12:12 pm

It can usually be observed that the PE of the 500 is directly
related to a Corporate A or BBB rated medium long bond yield
although the movement to that point may be slow if the
market has been trending overbought or oversold.

Below the 10 year TRSY is used, the correlation could be higher,
but the formula is giving a good result for current valuation.

A Formula for Fair P/E Ratios
age in bonds, buy-and-hold, 10 year business cycle

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by AnalogKid22 » Mon Aug 27, 2018 12:16 pm

Of course "nobody knows nothin," but this article from last week claims, with some metrics, that the market is far from overvalued: https://seekingalpha.com/article/420091 ... here-close

While this article from two days ago says the market is "slightly overvalued", however you choose to interpret that: https://www.morningstar.com/videos/8806 ... erval.html
A fool and his money are very easily parted - Anonymous

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by asif408 » Mon Aug 27, 2018 12:19 pm

I think by Tobin's Q it is not terrible. I imagine some of the forward earnings measures are ok, since those tend to be rosy and based on something that hasn't happened yet.

But if you are also invested in non-US stocks and have some bonds, why the worry?

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BuyAndHoldOn
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by BuyAndHoldOn » Mon Aug 27, 2018 12:19 pm

marcopolo wrote:
Mon Aug 27, 2018 12:11 pm
BuyAndHoldOn wrote:
Mon Aug 27, 2018 12:03 pm

"Reading" is a summary for media consumption. I read some articles, but I primarily listen to a lot of Bloomberg Podcasts; Meb Faber's podcast (he's been down on US equities for a while, longer-term); JP Morgan has some interesting podcasts: I follow a lot of finance-related media. Not really for investing purposes, although you can learn of some interesting market developments if you feel like being opportunistic [in some cases; and for better-or-worse].

Some references for valuation can be found at:
https://www.starcapital.de/en/research/ ... valuation/
https://interactive.researchaffiliates. ... ms=NOMINAL
How long have these people in the media that you are consuming been consistently out performing their relative benchmark indexes?

I suspect even they will tell you that it is mostly entertainment, not information, and certainly not knowledge.

It's more news/analysis than it is market predictions. Although I do listen to Jim Cramer also (but I don't invest in individual stocks; current employer/Stock Options excepting). --> I was just meaning to answer the question about what sources I was hearing from, and the point is: It's a common topic of discussion (although not like it was in January).

I *have* heard some pretty prescient calls on the Grant's Interest Rate Observer podcast. for one example: He had a guest in November 2017 that predicted the Volatility [trading] Crash that occurred in February (and was close on the timing)

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by Jack FFR1846 » Mon Aug 27, 2018 12:31 pm

I just got back from the future. 2048 to be exact. Looking at the electronic slate, I can see that.....wait.....Sodium Calcifite water batteries need more caffeine in them than what's available in 2018 so my electronic slate isn't turning on. Darn. I was going to give you valuations by year.

Oh well. I can tell you that the reconstituted Schwinn company bought out the failed Tesla assets and built electric bicycles for decades, anti-aging cream still doesn't work and there are still worthless time shares available for a couple hundred million quant-marks.
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HomerJ
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by HomerJ » Mon Aug 27, 2018 12:37 pm

This article by Larry Swedroe states that US stocks may not be too expensive.

https://www.etf.com/sections/swedroe-va ... nopaging=1
The preceding reasons help explain why the long-term median of the CAPE 10 has drifted upward. While the CAPE 10’s mean has been 16.9 over the entire period since 1880, from 1960 through April 2018, a period of more than 58 years, the mean has been 20.1. Since 1970, the mean has been 20.0. Since 1980, the mean has been 21.9. Since 1990, a period of almost 30 years, it has been a much higher 25.6.

When people state there is a risk that valuations revert to their mean, which mean should we expect them to revert to? The one that includes very different (and much riskier) economic and regulatory regimes? That’s comparing apples to oranges. Perhaps we should expect reversion to the mean over the more recent period beginning in 1990?

Summarizing, the important point is that if higher valuations are justified by systematic changes making equity investing less risky/less costly, while they may be forecasting lower future returns, they are not necessarily signaling overvaluation.
While the current U.S. CAPE 10 is 33, the current CAPE 8—which has about the same explanatory power as the CAPE 10 but excludes the very bad and temporarily depressed earnings figures from 2008 and 2009—is 5 points lower at 28. (Comparable figures for non-U.S. developed and emerging markets are about 19 and 15, respectively.)

That’s not all that much higher than the CAPE 10’s mean of 25.6 from 1990 through April 2018.
Additionally, if we use the CAPE 8 of 28, and make the adjustments for the accounting changes and the reduction in dividends, we get what we might call an adjusted CAPE 8 of about 23.5.
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by KlangFool » Mon Aug 27, 2018 12:39 pm

MotoTrojan wrote:
Mon Aug 27, 2018 12:11 pm
KlangFool wrote:
Mon Aug 27, 2018 11:56 am
BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?

I am not trying to be sarcastic. Just curious is all.


--> It is harder to stay the course with valuation signals though, I must admit. My tinkering - should there be any - would not be to *sell*, but rather to *not buy* more US equities until valuations calm down. (What if they never really do/did? And what metrics would I use?) --> Even then that doesn't appeal to me because I would need a better alternative, and I already invest heavily in Non-US equities (that's been fun the last few years, right everyone :happy ). I.e., I use approximately global market cap with a slight overweight to EM.
BuyAndHoldOn,

Why do this matters unless you are 100% US stock? Or, 100% stock?

<<I am not trying to be sarcastic. Just curious is all. >>

Same here. If someone is asking this question, the person is usually 100/0 in their AA. And, if the person is 100/0, that person needs to ask themselves a simple question why are they using this asset allocation? With this AA, you will buy the stock even if they are over-valued. And, if this is a concern for you, perhaps an AA of 70/30 makes a lot more sense.

I am 60/40. I do not have to buy over-valued stock.

KlangFool
KlangFool, while you may not be exposed to as much downside risk, what about a 60/40 allocation keeps you from buying overvalued (if that is such a thing) stocks? If the US stock market climbs at a hyperbolic rate, will you not still be buying per your AA?

I am 100/0 equities and 75% in the US (with a small-value tilt). Not worried.
MotoTrojan,

<< will you not still be buying per your AA? >>

Yes, I am. And, as per my AA, I will be buying the bond and/or selling stock to buy the bond. And, this is what I am doing now.

KlangFool

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BuyAndHoldOn
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by BuyAndHoldOn » Mon Aug 27, 2018 12:44 pm

asif408 wrote:
Mon Aug 27, 2018 12:19 pm
I think by Tobin's Q it is not terrible. I imagine some of the forward earnings measures are ok, since those tend to be rosy and based on something that hasn't happened yet.

But if you are also invested in non-US stocks and have some bonds, why the worry?
Thanks - I hadn't looked at Tobin's Q before.

I used words like "Concern" and "Worry" to express how I was feeling, but I know it really doesn't matter (several decade time horizon + other asset diversification [even though Global equities are all pretty correlated]). I don't know at what point I would stop buying US Equities: But I would get leery if I thought we were getting into a Bubble like 1980s Japan/ NASDAQ in 2000.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Mon Aug 27, 2018 1:02 pm

MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
I think you answered the OP question in the first response, but your answer was so accurate and meaningful; that it was mostly missed while we went on to the normal "dialogue." :sharebeer
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by MotoTrojan » Mon Aug 27, 2018 1:15 pm

FIREchief wrote:
Mon Aug 27, 2018 1:02 pm
MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
I think you answered the OP question in the first response, but your answer was so accurate and meaningful; that it was mostly missed while we went on to the normal "dialogue." :sharebeer
Tried my best :). Ignoring the February low the forward P/E has actually been contracting even as we continue to get good returns. I’m not acting on this but still interesting data.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by marcopolo » Mon Aug 27, 2018 1:22 pm

BuyAndHoldOn wrote:
Mon Aug 27, 2018 12:19 pm

I *have* heard some pretty prescient calls on the Grant's Interest Rate Observer podcast. for one example: He had a guest in November 2017 that predicted the Volatility [trading] Crash that occurred in February (and was close on the timing)
The problem is everyone remembers/touts that one call they got right. Forgetting about the ten others they made that may have not worked out quite as well.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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BuyAndHoldOn
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by BuyAndHoldOn » Mon Aug 27, 2018 1:34 pm

MotoTrojan wrote:
Mon Aug 27, 2018 1:15 pm
FIREchief wrote:
Mon Aug 27, 2018 1:02 pm
MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
I think you answered the OP question in the first response, but your answer was so accurate and meaningful; that it was mostly missed while we went on to the normal "dialogue." :sharebeer
Tried my best :). Ignoring the February low the forward P/E has actually been contracting even as we continue to get good returns. I’m not acting on this but still interesting data.
The comment was too useful and appropriate to be debated.

marcopolo wrote:
Mon Aug 27, 2018 1:22 pm
BuyAndHoldOn wrote:
Mon Aug 27, 2018 12:19 pm

I *have* heard some pretty prescient calls on the Grant's Interest Rate Observer podcast. for one example: He had a guest in November 2017 that predicted the Volatility [trading] Crash that occurred in February (and was close on the timing)
The problem is everyone remembers/touts that one call they got right. Forgetting about the ten others they made that may have not worked out quite as well.
Still was impressive. Who else was calling for a Volatility Trading crash in the next few months? I'm sure I can find the episode if you PM me.

Grant's has been saying US equities are too expensive for years; wouldn't have paid off to take their thoughts too seriously there.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by marcopolo » Mon Aug 27, 2018 1:40 pm

MotoTrojan wrote:
Mon Aug 27, 2018 1:15 pm
FIREchief wrote:
Mon Aug 27, 2018 1:02 pm
MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
I think you answered the OP question in the first response, but your answer was so accurate and meaningful; that it was mostly missed while we went on to the normal "dialogue." :sharebeer
Tried my best :). Ignoring the February low the forward P/E has actually been contracting even as we continue to get good returns. I’m not acting on this but still interesting data.
It is interesting.

It is not out of the realm of possibilities that CAPE-based valuations could return back to something resembling "normal" with a major crash through a combination of earnings growth that is faster than price growth, and the rolling off of poor earning from a decade ago. Factor in accounting changes to GAAP, and maybe the valuations are not that out of whack to historical "norms".
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by Stormbringer » Mon Aug 27, 2018 1:58 pm

Stocks may be a bit expensive, but bonds are even more expensive. At 2.8%, the 10-year is 35X earnings with no opportunity for growth.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by willthrill81 » Mon Aug 27, 2018 2:19 pm

MotoTrojan wrote:
Mon Aug 27, 2018 1:15 pm
FIREchief wrote:
Mon Aug 27, 2018 1:02 pm
MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
I think you answered the OP question in the first response, but your answer was so accurate and meaningful; that it was mostly missed while we went on to the normal "dialogue." :sharebeer
Tried my best :). Ignoring the February low the forward P/E has actually been contracting even as we continue to get good returns. I’m not acting on this but still interesting data.
:thumbsup

I believe that the forward P/E is more meaningful to stocks' performance going forward than earnings from a decade ago. The market is far more forward looking than backward looking.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Mon Aug 27, 2018 2:26 pm

marcopolo wrote:
Mon Aug 27, 2018 1:40 pm
MotoTrojan wrote:
Mon Aug 27, 2018 1:15 pm
FIREchief wrote:
Mon Aug 27, 2018 1:02 pm
MotoTrojan wrote:
Mon Aug 27, 2018 11:31 am
Forward S&P500 price/earnings look great.
I think you answered the OP question in the first response, but your answer was so accurate and meaningful; that it was mostly missed while we went on to the normal "dialogue." :sharebeer
Tried my best :). Ignoring the February low the forward P/E has actually been contracting even as we continue to get good returns. I’m not acting on this but still interesting data.
It is interesting.

It is not out of the realm of possibilities that CAPE-based valuations could return back to something resembling "normal" with a major crash through a combination of earnings growth that is faster than price growth, and the rolling off of poor earning from a decade ago. Factor in accounting changes to GAAP, and maybe the valuations are not that out of whack to historical "norms".
Valuations based upon current P/E's are not at all "out of whack." It's only when people insist upon adding in what happened years ago that we get these fantastic predictions of a market that will have very subdued (and historically low) returns for the next ten years.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by WhiteMaxima » Mon Aug 27, 2018 2:31 pm

It all depend on borrowing cost (ie interest rate). Low unemployment, consumption tax cut, inflow of USD, share buy back, all these support market value. But if the rate goes higher, everything could change. I will take some profit off the table.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by asif408 » Mon Aug 27, 2018 2:37 pm

willthrill81 wrote:
Mon Aug 27, 2018 2:19 pm
:thumbsup

I believe that the forward P/E is more meaningful to stocks' performance going forward than earnings from a decade ago. The market is far more forward looking than backward looking.
I would agree it is probably more meaningful if you have some level of faith in the accuracy of the data, but how accurate is a calculation based on "projected" earnings actually turn out to be? Trailing earnings are the past, and they may be misreported, but if I had to choose, I would put more faith in a measure using longer term flawed data of earnings that have actually happened than a measure that uses projections of earnings that have not yet happened.

Sort of the same way I would focus more on a politician's voting record and past transgressions over projections of what that politician will do in the future by pundits and prognosticators who, although they may know the person well, are still trying to predict the future.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by BolderBoy » Mon Aug 27, 2018 2:41 pm

BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?
I have zero idea if "stocks" are expensive or not. If I have money to invest it gets invested right away into the index funds that comprise my AA. Been doing it that way for a long time, ignoring the hew and cry of folks proclaiming that stocks are expensive. I've done quite well following that stratagem.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by willthrill81 » Mon Aug 27, 2018 2:41 pm

asif408 wrote:
Mon Aug 27, 2018 2:37 pm
willthrill81 wrote:
Mon Aug 27, 2018 2:19 pm
:thumbsup

I believe that the forward P/E is more meaningful to stocks' performance going forward than earnings from a decade ago. The market is far more forward looking than backward looking.
I would agree it is probably more meaningful if you have some level of faith in the accuracy of the data, but how accurate is a calculation based on "projected" earnings actually turn out to be? Trailing earnings are the past, and they may be misreported, but if I had to choose, I would put more faith in a measure using longer term flawed data of earnings that have actually happened than a measure that uses projections of earnings that have not yet happened.

Sort of the same way I would focus more on a politician's voting record and past transgressions over projections of what that politician will do in the future by pundits and prognosticators who, although they may know the person well, are still trying to predict the future.
It's not a question of what you or I have faith in but what the market values. Few investors buy stocks today because of their earnings a decade ago. We buy stocks for what they will do for us going forward. The past can certainly give us an idea as to what the future might look like, but future earnings are of bigger concern to most than past earnings.
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by MotoTrojan » Mon Aug 27, 2018 2:46 pm

willthrill81 wrote:
Mon Aug 27, 2018 2:41 pm
asif408 wrote:
Mon Aug 27, 2018 2:37 pm
willthrill81 wrote:
Mon Aug 27, 2018 2:19 pm
:thumbsup

I believe that the forward P/E is more meaningful to stocks' performance going forward than earnings from a decade ago. The market is far more forward looking than backward looking.
I would agree it is probably more meaningful if you have some level of faith in the accuracy of the data, but how accurate is a calculation based on "projected" earnings actually turn out to be? Trailing earnings are the past, and they may be misreported, but if I had to choose, I would put more faith in a measure using longer term flawed data of earnings that have actually happened than a measure that uses projections of earnings that have not yet happened.

Sort of the same way I would focus more on a politician's voting record and past transgressions over projections of what that politician will do in the future by pundits and prognosticators who, although they may know the person well, are still trying to predict the future.
It's not a question of what you or I have faith in but what the market values. Few investors buy stocks today because of their earnings a decade ago. We buy stocks for what they will do for us going forward. The past can certainly give us an idea as to what the future might look like, but future earnings are of bigger concern to most than past earnings.
Even if you don't want to trust forecasts, H1 earnings is past/fact and will make the not so distant trailing (1-year) P/E look pretty good. CAPEs 10-year period will always have some lag to it. In more normal situations this lag may not hurt much, but coming out of a historically significant market event I would wager it makes more sense for earnings growth to outperform history and increase the impact of the 10-year weighted P/E's lag.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by JoMoney » Mon Aug 27, 2018 2:51 pm

In addition to forward P/E which was already mentioned,
The "Fed Model", or earnings yield compared to 10yr Treasuries.
"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: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Mon Aug 27, 2018 2:56 pm

asif408 wrote:
Mon Aug 27, 2018 2:37 pm
Sort of the same way I would focus more on a politician's voting record and past transgressions over projections of what that politician will do in the future by pundits and prognosticators who, although they may know the person well, are still trying to predict the future.
I think that corporate executives are typically (not always) much more accountable to the markets then politicians are to the voters. We have many reports of CEOs who fall short of their estimated earnings and get fired, so a lot of the corporate projections tend to be conservative (I believe that well over 50% of corporate forecast earnings are exceeded). Politicians? Well now, that's a different matter......
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by asif408 » Mon Aug 27, 2018 3:03 pm

FIREchief wrote:
Mon Aug 27, 2018 2:56 pm
asif408 wrote:
Mon Aug 27, 2018 2:37 pm
Sort of the same way I would focus more on a politician's voting record and past transgressions over projections of what that politician will do in the future by pundits and prognosticators who, although they may know the person well, are still trying to predict the future.
I think that corporate executives are typically (not always) much more accountable to the markets then politicians are to the voters. We have many reports of CEOs who fall short of their estimated earnings and get fired, so a lot of the corporate projections tend to be conservative (I believe that well over 50% of corporate forecast earnings are exceeded).
Would love to see the actual data on that if you can find it and share.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by JoMoney » Mon Aug 27, 2018 3:08 pm

Regarding using Forward PE:
Image
While the R^2 of 44% isn't great, compared to other metrics people use like CAPE, it looks to be relatively better, based on the results from a Vanguard paper:
Image
"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: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Mon Aug 27, 2018 3:10 pm

asif408 wrote:
Mon Aug 27, 2018 3:03 pm
FIREchief wrote:
Mon Aug 27, 2018 2:56 pm
asif408 wrote:
Mon Aug 27, 2018 2:37 pm
Sort of the same way I would focus more on a politician's voting record and past transgressions over projections of what that politician will do in the future by pundits and prognosticators who, although they may know the person well, are still trying to predict the future.
I think that corporate executives are typically (not always) much more accountable to the markets then politicians are to the voters. We have many reports of CEOs who fall short of their estimated earnings and get fired, so a lot of the corporate projections tend to be conservative (I believe that well over 50% of corporate forecast earnings are exceeded).
Would love to see the actual data on that if you can find it and share.
I just googled it and there are many options to choose from. I'm not normally a big fan of Marketwatch, but here's one of the first hits that reports 61%.

https://www.marketwatch.com/story/one-n ... 2016-07-11
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Mon Aug 27, 2018 3:12 pm

JoMoney wrote:
Mon Aug 27, 2018 3:08 pm
Regarding using Forward PE:
Image
While the R^2 of 44% isn't great, compared to other metrics people use like CAPE, it looks to be relatively better, based on the results from a Vanguard paper:
Image
Thanks for that. I really don't rely on forward P/E (or any other methodology for that matter) to try to predict the future. I really only use it to explain why CAPE 10 is so useless (of course, that's just one man's opinion). :beer
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by JoMoney » Mon Aug 27, 2018 3:34 pm

While not a typical metric, it doesn't look too high if you look at the overall growth trend relative to what has been (sometimes mockingly) dubbed the "Siegel Constant" based on Prof. Jeremey Siegel's findings on the long-term average of 7% growth in U.S. stocks:
Image
Image
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by alex_686 » Mon Aug 27, 2018 3:43 pm

asif408 wrote:
Mon Aug 27, 2018 2:37 pm
I would agree it is probably more meaningful if you have some level of faith in the accuracy of the data, but how accurate is a calculation based on "projected" earnings actually turn out to be? Trailing earnings are the past, and they may be misreported, but if I had to choose, I would put more faith in a measure using longer term flawed data of earnings that have actually happened than a measure that uses projections of earnings that have not yet happened.
Would you rather drive with perfect 20/20 vision using the rear-view mirror, or stare forward into the foggy mist? If you want to know what earnings will be next year, use forward earnings. That being said, we are only talking about earnings, we are not talking about P/E ratios or price. Just want to be clear on that.

To the OP, I prefer the Yardeni model over the fed model since it incorporates credit risk, and thus (maybe) the equity risk premium. That being said, you can drive a bus though the error bars of both models. At least the model is designed to tell you when the market is overvalued.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by minimalistmarc » Mon Aug 27, 2018 3:50 pm

KlangFool wrote:
Mon Aug 27, 2018 11:56 am
BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?

I am not trying to be sarcastic. Just curious is all.


--> It is harder to stay the course with valuation signals though, I must admit. My tinkering - should there be any - would not be to *sell*, but rather to *not buy* more US equities until valuations calm down. (What if they never really do/did? And what metrics would I use?) --> Even then that doesn't appeal to me because I would need a better alternative, and I already invest heavily in Non-US equities (that's been fun the last few years, right everyone :happy ). I.e., I use approximately global market cap with a slight overweight to EM.
BuyAndHoldOn,

Why do this matters unless you are 100% US stock? Or, 100% stock?

<<I am not trying to be sarcastic. Just curious is all. >>

Same here. If someone is asking this question, the person is usually 100/0 in their AA. And, if the person is 100/0, that person needs to ask themselves a simple question why are they using this asset allocation? With this AA, you will buy the stock even if they are over-valued. And, if this is a concern for you, perhaps an AA of 70/30 makes a lot more sense.

I am 60/40. I do not have to buy over-valued stock.

KlangFool
Klangfool, 100/0 is never really the true state in the accumulation phase as cash pile is always accumulating to buy more stock.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by KlangFool » Mon Aug 27, 2018 3:57 pm

minimalistmarc wrote:
Mon Aug 27, 2018 3:50 pm
KlangFool wrote:
Mon Aug 27, 2018 11:56 am
BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?

I am not trying to be sarcastic. Just curious is all.


--> It is harder to stay the course with valuation signals though, I must admit. My tinkering - should there be any - would not be to *sell*, but rather to *not buy* more US equities until valuations calm down. (What if they never really do/did? And what metrics would I use?) --> Even then that doesn't appeal to me because I would need a better alternative, and I already invest heavily in Non-US equities (that's been fun the last few years, right everyone :happy ). I.e., I use approximately global market cap with a slight overweight to EM.
BuyAndHoldOn,

Why do this matters unless you are 100% US stock? Or, 100% stock?

<<I am not trying to be sarcastic. Just curious is all. >>

Same here. If someone is asking this question, the person is usually 100/0 in their AA. And, if the person is 100/0, that person needs to ask themselves a simple question why are they using this asset allocation? With this AA, you will buy the stock even if they are over-valued. And, if this is a concern for you, perhaps an AA of 70/30 makes a lot more sense.

I am 60/40. I do not have to buy over-valued stock.

KlangFool
Klangfool, 100/0 is never really the true state in the accumulation phase as cash pile is always accumulating to buy more stock.
minimalistmarc,

That statement is only true if a person is continuously fully employed until retirement. I am not that lucky.

KlangFool

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by jalbert » Mon Aug 27, 2018 4:03 pm

But are there any metrics under which US Equities are *not* expensive?
Yes. The efficient market hypothesis would posit that all publicly known information about a stock is priced in efficiently and current market price is the market’s aggregate best estimate of discounting in a risk premium for future returns.
Risk is not a guarantor of return.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by JoMoney » Mon Aug 27, 2018 5:05 pm

alex_686 wrote:
Mon Aug 27, 2018 3:43 pm
...
To the OP, I prefer the Yardeni model over the fed model since it incorporates credit risk, and thus (maybe) the equity risk premium. That being said, you can drive a bus though the error bars of both models. At least the model is designed to tell you when the market is overvalued.
FWIW:
Image
https://www.yardeni.com/pub/buybackdiv.pdf
"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: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Mon Aug 27, 2018 5:10 pm

This thread is entertaining. It's starting to sound like we can restate the original question as "If we throw out CAPE 10, are then any other metrics that DO say that US Stocks are expensive?"
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by JoMoney » Mon Aug 27, 2018 5:25 pm

FIREchief wrote:
Mon Aug 27, 2018 5:10 pm
This thread is entertaining. It's starting to sound like we can restate the original question as "If we throw out CAPE 10, are then any other metrics that DO say that US Stocks are expensive?"
We can frame CAPE in a way that's not expensive too...
Average CAPE for past 21 years was 25.7
http://www.multpl.com/table

Code: Select all

Jan 1, 2018	24.97
Jan 1, 2017	23.59
Jan 1, 2016	22.18
Jan 1, 2015	20.02
Jan 1, 2014	18.15
Jan 1, 2013	17.03
Jan 1, 2012	14.87
Jan 1, 2011	16.30
Jan 1, 2010	20.70
Jan 1, 2009	70.91
Jan 1, 2008	21.46
Jan 1, 2007	17.36
Jan 1, 2006	18.07
Jan 1, 2005	19.99
Jan 1, 2004	22.73
Jan 1, 2003	31.43
Jan 1, 2002	46.17
Jan 1, 2001	27.55
Jan 1, 2000	29.04
Jan 1, 1999	32.92
Jan 1, 1998	24.29
"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: Any metrics that say US Stocks are *NOT* expensive?

Post by asif408 » Mon Aug 27, 2018 7:46 pm

alex_686 wrote:
Mon Aug 27, 2018 3:43 pm
Would you rather drive with perfect 20/20 vision using the rear-view mirror, or stare forward into the foggy mist? If you want to know what earnings will be next year, use forward earnings. That being said, we are only talking about earnings, we are not talking about P/E ratios or price. Just want to be clear on that.
I think I am having a case of deja vu, as we may have had this discussion previously. To me, your analogy is incorrect, and a more appropriate analogy is the choice between driving with perfect 20/20 vision using the rear view mirror of staring through a front windshield that is completely black. I'll take the rear view mirror with 20/20 vision. Yes, we are talking about earnings, but earnings are used in the calculation for P/E ratios, so that does matter to the P/E ratios.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by JackoC » Mon Aug 27, 2018 9:57 pm

A recent column by Mark Hulbert in the WSJ went over 8 valuation measures and how basically all say stocks (US in particular) are expensive by historic standards. It's behind a pay wall (or maybe people have a way to look past that legitimately I don't know). I found it a fair discussion. He gave the rebuttal on a number of indicators by the famous usually if not perma-bull Jeremy Siegel.

Basically there are no indicators saying the US market is not more expensive than it has usually been. However
a) the indicators don't necessarily mean the exact same thing now that they have in the past. CAPE or other PE measures should tend to be higher when interest rates (particularly real rates) are lower. Raw historical comparison by percentile doesn't include that. Vanguard Research calculates a 'fair market CAPE' and says today's is still high, but not *as* high as in an uncorrected historical comparison. Also as Siegel points out here and often does, and others do, price/earnings measures are subject to changing definitions of earnings.

Likewise the Q measure doesn't reflect change in the relative value of tangible and intangible assets in different types of businesses which dominate the stock market at different times. There's arguably good reason that intangible value is higher now.

And so forth to some degree for at least most measures.

b) As a rule *all* assets are expensive now by historical standards. Besides bonds (as in comparison of PE to rates), rental real estate is generally. Foreign stocks are to some degree if not obviously as much as US ones, and so forth for nearly everything compared *to its own history*.

c) It's as uncertain as anything else when or if expensive assets will get less expensive. Many people seem to interpret 'stocks are expensive' as an unspoken claim by the speaker they know when they will get less expensive.

d) to further sharpen point c), saying US stocks are historically expensive by almost every measure has nothing to do with predicting near term market gyrations. The first is a fact, the second a prediction which is exceeding difficult (arguably impossible) to be right about a high % of the time. Nor is valuation a historically good predictor of near term realized return.

But expensive assets *do* tend to mean lower expected returns. That's a mathematical relationship for riskless instruments (the fact that yields on TIPS are lower nowadays than they used to be means expected real returns on them to maturity are lower, give or take a limited amount of noise from coupon reinvestment). It's a much noisier relationship for low earnings yield stocks, but it's still there.

https://www.wsj.com/articles/the-8-best ... 1533521521

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by Bastiat » Mon Aug 27, 2018 10:43 pm

BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
But are there any metrics under which US Equities are *not* expensive?
The only one that matters: Bid.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by willthrill81 » Mon Aug 27, 2018 11:54 pm

asif408 wrote:
Mon Aug 27, 2018 7:46 pm
alex_686 wrote:
Mon Aug 27, 2018 3:43 pm
Would you rather drive with perfect 20/20 vision using the rear-view mirror, or stare forward into the foggy mist? If you want to know what earnings will be next year, use forward earnings. That being said, we are only talking about earnings, we are not talking about P/E ratios or price. Just want to be clear on that.
I think I am having a case of deja vu, as we may have had this discussion previously. To me, your analogy is incorrect, and a more appropriate analogy is the choice between driving with perfect 20/20 vision using the rear view mirror of staring through a front windshield that is completely black. I'll take the rear view mirror with 20/20 vision. Yes, we are talking about earnings, but earnings are used in the calculation for P/E ratios, so that does matter to the P/E ratios.
So to be clear, you're saying that forward P/E ratios are worthless (i.e. a completely opaque windshield in your analogy)?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by jclear » Tue Aug 28, 2018 12:58 am

asif408 wrote:
Mon Aug 27, 2018 3:03 pm
FIREchief wrote:
Mon Aug 27, 2018 2:56 pm
I think that corporate executives are typically (not always) much more accountable to the markets then politicians are to the voters. We have many reports of CEOs who fall short of their estimated earnings and get fired, so a lot of the corporate projections tend to be conservative (I believe that well over 50% of corporate forecast earnings are exceeded).
Would love to see the actual data on that if you can find it and share.
This paper
https://papers.ssrn.com/sol3/papers.cfm ... id=1687125
draws its data from the First Call Company Issued Guidance database.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by NoHeat » Tue Aug 28, 2018 1:53 am

BuyAndHoldOn wrote:
Mon Aug 27, 2018 11:28 am
I keep reading about how expensive US Equites are by every measure. The most alarming ones are the historical-basis ones, like CAPE, "equity risk premium", price/cash flow over time, etc.

But are there any metrics under which US Equities are *not* expensive?
Yes, there is at least one: Compare bond yields to stock dividend yield.

For decades, until 2008, bond yields were higher than stock dividend yields by a sizable ratio of three or more. Since 2008, that ratio has fallen well below one, which would argue that stocks were cheap compared to bonds, Lately that ratio has crept up, but is still much smaller than historic norms.

For the data, see the graph in this article:
https://www.bloomberg.com/view/articles ... ond-yields

The logic behind valuing stocks based on bonds is simply that bonds are the alternative to stocks. I’m not advocating this as the sole way to judge the valuation of the stock market, but it does answer the OP’s question.

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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by selters » Tue Aug 28, 2018 2:57 am

Absolutely. The fwd p/e of the S&P 500, which is abou 17.5. Stocks are only expensive now if earnings are at a cyclical high. They may not revert back down as much as tvey have in the past.

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