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

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asif408
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by asif408 » Tue Aug 28, 2018 5:42 am

willthrill81 wrote:
Mon Aug 27, 2018 11:54 pm
So to be clear, you're saying that forward P/E ratios are worthless (i.e. a completely opaque windshield in your analogy)?
No, what I'm saying is that whether you use forward or trainings earnings, neither one can actually see the future. Alex implies with his analogy that you can actually see future events. Both estimates are based on past or current information, no one has information about future events that have not occurred.

Assuming the data shown here is true that is not strong evidence that forward P/E are superior to other valuation metrics. Personally I don't use one, I'd rather use a basket of them, and that is what the OP is asking. So we shouldn't waste time arguing over one metric.

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

Post by JackoC » Tue Aug 28, 2018 8:53 am

NoHeat wrote:
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.
It's a fundamental ambiguity in the question, expensive in absolute terms or relative to some other asset(s)? In absolute terms US stocks are expensive by almost every past measure, not every single one but almost all*. The picture changes significantly if you compare to some other assets, including US govt bonds. And US govt bonds are definitely expensive by past standards.

Also, the 'Fed model' idea of comparing a *nominal* bond yield to quasi-*real* dividend yield is basically suspect. The real treasury yield and the dividend yield are what you'd want to compare, but that requires machinations to estimate the ex-ante real yield of treasuries in the pre-TIPS era. Just figuring out what treasuries returned ex-post in real terms (ie including unexpected inflation) isn't exactly it. But it doesn't change the basic point. Real treasury yields now are very low (not as low as a few years ago but still historically by any reasonable estimate): US govt bonds are historically expensive. So high stock valuations need to be cut a break in a relative comparison. Whether stocks are still expensive even relative to bonds can be debated. There's no reasonable argument however IMO that bonds are historically expensive but stocks aren't.

*If forward PE in one year of the economic cycle (in the midst of a late cycle fiscal stimulus no less) was a far superior measure to all others that would be one thing. But Schiller's basic insight that it's better to compare price to earnings over the cycle, is sound. The exact mechanics of how to do that, what to compare (past CAPE's, past CAPE's relative to past real interest rates?, etc), how the meaning of 'earnings' changes over time, good questions. But IMO the weakness in taking one year's projected earnings as a measure of expected return (over any period long enough for 'expected return' to mean anything) is too obvious for it to matter much what the scatter plot looks like throwing numbers against the wall to see if they stick. Measures should make logical sense as estimators of E[r], *then* see how they really work. Similarly with the basic conceptual flaw of the 'Fed model'. We can always find measures that happen to predict past returns statistically but we know are weak in fundamental validity (who won the Super Bowl or something, as an admittedly much more extreme example, but same general idea).

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

Post by HomerJ » Tue Aug 28, 2018 8:57 am

asif408 wrote:
Tue Aug 28, 2018 5:42 am
willthrill81 wrote:
Mon Aug 27, 2018 11:54 pm
So to be clear, you're saying that forward P/E ratios are worthless (i.e. a completely opaque windshield in your analogy)?
No, what I'm saying is that whether you use forward or trainings earnings, neither one can actually see the future. Alex implies with his analogy that you can actually see future events. Both estimates are based on past or current information, no one has information about future events that have not occurred.
He implies you can guess at near-term future events based on current events.

Bond yields next year... Can you say it's impossible to make any prediction at all?

Isn't it likely they will be within a point or two of TODAY's yields?

Completely blacked out front-window. Bond yields in the next year could be ANYTHING... -3%-10%

Fogged up front-window. Bond yields over the next 12 months will very probably be around 2%-4% based on today's values.
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by HomerJ » Tue Aug 28, 2018 9:01 am

JackoC wrote:
Tue Aug 28, 2018 8:53 am
*If forward PE in one year of the economic cycle (in the midst of a late cycle fiscal stimulus no less) was a far superior measure to all others that would be one thing.
It's just one metric. It shouldn't be considered superior. OP asked if ANY metrics said US stocks are not expensive.
But Schiller's basic insight that it's better to compare price to earnings over the cycle, is sound.
Possibly, but it's been pretty poor at predicting returns since he discovered it.

And CAPE 8 (which supposedly is just as statistically sound as CAPE 10) is 5 points lower than CAPE 10 (because you drop off large outlier 2008-2009).

Which one is telling the true story?
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by alex_686 » Tue Aug 28, 2018 9:33 am

HomerJ wrote:
Tue Aug 28, 2018 8:57 am
asif408 wrote:
Tue Aug 28, 2018 5:42 am
willthrill81 wrote:
Mon Aug 27, 2018 11:54 pm
So to be clear, you're saying that forward P/E ratios are worthless (i.e. a completely opaque windshield in your analogy)?
No, what I'm saying is that whether you use forward or trainings earnings, neither one can actually see the future. Alex implies with his analogy that you can actually see future events. Both estimates are based on past or current information, no one has information about future events that have not occurred.
He implies you can guess at near-term future events based on current events.
What I actually believe is that a stock's value is it's Future Cash Flow to Equity (FCFE) and if you are going to invest in stocks you are going to have to estimate future earnings and interest rates. Then you need to slap on a set of error bars a.k.a. or risk. Be confident and humble. Hence my allusion to "fog on the highway" - a metaphor that I have used often.

asif408, 2 more points.

I would not blend trailing and forward estimates. Forward estimates already have past data blended into them. If you are going to do that you might as well scrap the published forward estimates and come up with your own.

For predictive power I will point you to JoMoney's posts. He does a fine job of laying out the power of various measures. One point though. When you want to know the market's earnings, CAPE10 does better than forward earnings. Top down measures work better. When you want to know a individual company earnings, use forward earnings. There is a bit of a disconnect between optimistic analysis working on individual companies and pessimistic economics estimating economic activity.

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

Post by JackoC » Tue Aug 28, 2018 10:29 am

HomerJ wrote:
Tue Aug 28, 2018 9:01 am
JackoC wrote:
Tue Aug 28, 2018 8:53 am
*If forward PE in one year of the economic cycle (in the midst of a late cycle fiscal stimulus no less) was a far superior measure to all others that would be one thing.
1. It's just one metric. It shouldn't be considered superior. OP asked if ANY metrics said US stocks are not expensive.
But Schiller's basic insight that it's better to compare price to earnings over the cycle, is sound.
2. Possibly, but it's been pretty poor at predicting returns since he discovered it.

And CAPE 8 (which supposedly is just as statistically sound as CAPE 10) is 5 points lower than CAPE 10 (because you drop off large outlier 2008-2009).

Which one is telling the true story?
1. True it's one measure, but still the fact one has to go to just one measure or a few, and generally the ones with the least logical validity, is telling IMO.

2. There's no reasonable argument I can see why you wouldn't want to correct for variation in earnings over the business cycle with any kind of long term outlook. So IMO a cyclically adjust measure definitely not 'possibly' makes more sense.

The *realized return* has a large element of randomness. There is basically no way to accurately predict it. But there is good reason to believe some measures are relatively better at estimating the *expected return*. Which shows up in the *relatively* higher correlation to the realized return, such as various CAPE measures have, with the predicate of a fundamental reason they should. Whereas there's less reason a spot fwd earnings PE at one year in the cycle should be predictive longer term, less still for any measure comparing nominal treasury yield to real E[r] of stocks, and none to who won the Super Bowl. Although in the noise of the randomness, all that can be confusing. Point is, saying "X wasn't a highly accurate predictor" of realized return in stocks applies to *everything*. It's not much of an argument against particular measures. That a measure makes little fundamental sense is a better argument against it, relatively speaking.

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

Post by willthrill81 » Tue Aug 28, 2018 10:54 am

asif408 wrote:
Tue Aug 28, 2018 5:42 am
willthrill81 wrote:
Mon Aug 27, 2018 11:54 pm
So to be clear, you're saying that forward P/E ratios are worthless (i.e. a completely opaque windshield in your analogy)?
No, what I'm saying is that whether you use forward or trainings earnings, neither one can actually see the future. Alex implies with his analogy that you can actually see future events. Both estimates are based on past or current information, no one has information about future events that have not occurred.

Assuming the data shown here is true that is not strong evidence that forward P/E are superior to other valuation metrics. Personally I don't use one, I'd rather use a basket of them, and that is what the OP is asking. So we shouldn't waste time arguing over one metric.
So if forward P/E ratios are not worthless, what do you see their value to be?
“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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willthrill81
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by willthrill81 » Tue Aug 28, 2018 11:02 am

JackoC wrote:
Tue Aug 28, 2018 10:29 am
The *realized return* has a large element of randomness. There is basically no way to accurately predict it. But there is good reason to believe some measures are relatively better at estimating the *expected return*. Which shows up in the *relatively* higher correlation to the realized return, such as various CAPE measures have, with the predicate of a fundamental reason they should. Whereas there's less reason a spot fwd earnings PE at one year in the cycle should be predictive longer term, less still for any measure comparing nominal treasury yield to real E[r] of stocks, and none to who won the Super Bowl. Although in the noise of the randomness, all that can be confusing. Point is, saying "X wasn't a highly accurate predictor" of realized return in stocks applies to *everything*. It's not much of an argument against particular measures. That a measure makes little fundamental sense is a better argument against it, relatively speaking.
The point remains that the predictive ability of CAPE since Shiller put it forward has been significantly less than the backtested data used to 'create' it. That means that there is a possibility that CAPE is not as worthwhile in predicting future stock returns as originally believed.
“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 hdas » Tue Aug 28, 2018 11:22 am

willthrill81 wrote:
Tue Aug 28, 2018 11:02 am
The point remains that the predictive ability of CAPE since Shiller put it forward has been significantly less than the backtested data used to 'create' it. That means that there is a possibility that CAPE is not as worthwhile in predicting future stock returns as originally believed.
This is key, not only the data but the dubious methods..........you are being extremely generous with the Nobelist professor. H

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

Post by garlandwhizzer » Tue Aug 28, 2018 1:15 pm

MotoTrojan wrote:
Forward S&P500 price/earnings look great.
Forward earnings estimates are notoriously inaccurate and systematically overoptimistic. The analysts who create them are in the business of selling stocks and they tend to be quite optimistic about the benefits of what they're selling as does anyone who sells anything. Historical analysis shows on average forward earnings overestimate earnings by 10% but there is wide distribution of errors, almost all of them overstating future earnings but some by 25% others by 5%. There are no accurate measures on which to project the market's future but forward earnings are IMO among the worst yardsticks. Past 12 months PE is backward looking but it is more based on reality than a sales pitch. I believe PE although imperfect to be a better indicator than forward PE which the financial industry embraces and uses to justify what appear to be pricy equities.

For an article that examines this question in detail I suggest the article: Dumb Alpha:Trailing or Forward Earnings? by Joachim Klement, CFA. https://blogs.cfainstitute.org/investor ... -earnings/

Direct quote from article:
Why don’t forward P/E ratios work as a measure of value? The answer is rooted in analysts’ estimates of future company earnings. As I demonstrated in the second installment of this series, analysts are terrible at predicting interest rates, exchange rates, or stock market performance over the coming 12 months. And they are similarly inept at predicting company earnings. In fact, using trailing 12-month earnings is typically a better predictor than analyst-estimated forward earnings. This is why trailing P/E ratios do a better job at selecting value stocks than forward P/Es.

What explains the lack of accuracy in forward earnings estimates? Quite simply, analysts are overly optimistic. Forward earnings are, on average, about 10% higher than subsequently realized earnings. However, this excess of optimism is not stable over time or across stocks. Paul Hribar and John McInnis show that analyst overoptimism rises when investor sentiment is buoyant — particularly for growth stocks with hard-to-estimate future earnings. And recent research by Ulrike Malmendier and Devin Shanthikumar demonstrates that while analysts on average are overly optimistic, those affiliated with an underwriter of a company’s securities tend to be strategically overoptimistic and thus systematically distort their forecasts.
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by FIREchief » Tue Aug 28, 2018 2:35 pm

asif408 wrote:
Tue Aug 28, 2018 5:42 am
No, what I'm saying is that whether you use forward or trainings earnings, neither one can actually see the future. Alex implies with his analogy that you can actually see future events. Both estimates are based on past or current information, no one has information about future events that have not
This is not entirely true. In some cases, forward earnings projections are based upon real and current information. Some businesses have forward revenues "booked" (i.e. under firm contract). They also have established labor contracts, loan contracts with lenders, known tax rates, etc. In these situations, 12 month forward looking earnings can be substantially "known."
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 » Tue Aug 28, 2018 2:38 pm

JackoC wrote:
Tue Aug 28, 2018 8:53 am
In absolute terms US stocks are expensive by almost every past measure, not every single one but almost all*.
If I count CAPE 10 based forecasts as "one" measure (which I do), then I will challenge your "almost all" statement. We've seen multiple examples within this thread of other measures that do not portray the gloom and doom of the CAPE 10 measures.
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 » Tue Aug 28, 2018 2:40 pm

HomerJ wrote:
Tue Aug 28, 2018 9:01 am
And CAPE 8 (which supposedly is just as statistically sound as CAPE 10) is 5 points lower than CAPE 10 (because you drop off large outlier 2008-2009).

Which one is telling the true story?
Thanks HomerJ. This is very telling, and does a great job of illustrating just how silly it is to be basing future forecasts on something that happened 8 - 10 years ago.
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 NoRegret » Tue Aug 28, 2018 2:52 pm

http://scottgrannis.blogspot.com/2018/0 ... -huge.html

See the S&P P/E using NIPA profits from the link above. Scott Grannis has been a consistent cheerleader (not meant to be a negative) for this economy. You can also read Ed Yardeni on the strength of corporate profits. http://blog.yardeni.com

CAPE is a slow moving measure. Within PE the relationship between TTM and CAPE suggests recent performance (from which we can Infer future performance too) is important. I’ve posted this link before:
http://econompicdata.blogspot.com/2018/ ... e-and.html

FWIW, I believe the market is on the expensive side but not so expensive that a top is immanent, i.e. it will likely get even more expensive from here. The medium term technical strength is quite evident.

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

Post by willthrill81 » Tue Aug 28, 2018 2:55 pm

FIREchief wrote:
Tue Aug 28, 2018 2:40 pm
HomerJ wrote:
Tue Aug 28, 2018 9:01 am
And CAPE 8 (which supposedly is just as statistically sound as CAPE 10) is 5 points lower than CAPE 10 (because you drop off large outlier 2008-2009).

Which one is telling the true story?
Thanks HomerJ. This is very telling, and does a great job of illustrating just how silly it is to be basing future forecasts on something that happened 8 - 10 years ago.
In that same vein, I find it very interesting that some deride forward P/E forecasts so strongly but then hold to CAPE and the belief that earnings from 2008 are relevant for forecasting stock returns from 2018 to 2028 or even beyond.
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by alex_686 » Tue Aug 28, 2018 3:19 pm

willthrill81 wrote:
Tue Aug 28, 2018 2:55 pm
In that same vein, I find it very interesting that some deride forward P/E forecasts so strongly but then hold to CAPE and the belief that earnings from 2008 are relevant for forecasting stock returns from 2018 to 2028 or even beyond.
So let us take a step back and look at what CAPE is and how it should be used. It is supposed to make a generalized estimate of long term stock returns based on historical trends. It is a very simple generic model. It is parsimonious, which is darn important. It is robust to secular changes, which many models are not.

It is based on the premise that short term returns are jagged, and accounting charges are even more jagged, but that long term returns are fairly constant - ignoring secular changes. I will point out that forward earnings are based on the same assumption. The only difference is that CAPE uses a mechanically method while forward earnings are generated by analysis, wisdom, skill, and some optimistic thinking.

For those of you who are complaining that CAPE only has a 40% predictive power I will ask you to point me to another model which has greater predictive power. I can point to other models but they are much more complex and rely on subjective inputs.

Lastly, it does not make a prediction if the market is under/over valued. It just tries to predict long term stock returns.

The glass is half full, not half empty.
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by KyleAAA » Tue Aug 28, 2018 3:22 pm

Morningstar's bottom-up approach concludes the market is fairly valued right now

https://www.morningstar.com/tools/marke ... graph.html

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

Post by willthrill81 » Tue Aug 28, 2018 3:39 pm

alex_686 wrote:
Tue Aug 28, 2018 3:19 pm
It is based on the premise that short term returns are jagged, and accounting charges are even more jagged, but that long term returns are fairly constant - ignoring secular changes. I will point out that forward earnings are based on the same assumption. The only difference is that CAPE uses a mechanically method while forward earnings are generated by analysis, wisdom, skill, and some optimistic thinking.

For those of you who are complaining that CAPE only has a 40% predictive power I will ask you to point me to another model which has greater predictive power. I can point to other models but they are much more complex and rely on subjective inputs.
Investors' average stock allocation has been a far better predictor than CAPE, explaining nearly 83% of the variation in subsequent ten year stock returns since 1945. Now some will poke holes in this indicator, which is certainly possible (with CAPE as well), but the point remains that it is (1) parsimonious, (2) simple, (3) and 'robust to secular changes'. Here's an explanation for why it purportedly works. Could it be merely a statistical artifact? Of course, and so could CAPE.

And as pointed out by Jomoney already in this thread, forward P/E has been roughly equivalent to CAPE in explanatory power.
alex_686 wrote:
Tue Aug 28, 2018 3:19 pm
It just tries to predict long term stock returns.
Since Shiller introduced it, it hasn't done so well. I don't recall the precise numbers, but I believe that its explanatory power has been far lower than 40%.
“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 JackoC » Wed Aug 29, 2018 12:08 pm

FIREchief wrote:
Tue Aug 28, 2018 2:38 pm
JackoC wrote:
Tue Aug 28, 2018 8:53 am
In absolute terms US stocks are expensive by almost every past measure, not every single one but almost all*.
If I count CAPE 10 based forecasts as "one" measure (which I do), then I will challenge your "almost all" statement. We've seen multiple examples within this thread of other measures that do not portray the gloom and doom of the CAPE 10 measures.
A possible problem with this debate is that people mean different things by 'expensive'. I do not mean 'gloom and doom'. I mean the same thing I mean when I say US govt bonds are historically expensive. Their real yields are low by historical standards. If you buy them you get a low return by historical standards out to the term of the bond. I do not mean that I somehow know that US govt bond rates will increase dramatically or when they might, and thus give me a higher return if I wait for that to happen before buying them.

My view of stock valuation is basically analogous. Most measures, not just CAPE10, show that US stocks are expensive in terms of the implied expected return. The ones which don't tend to be logically challenged as to why they should be indicative in terms of a long term expected return. Comparisons of *nominal* treasury yields to stock dividends don't make any sense, so that IMO eliminates that category of indicator. And also in IMO it's obvious why a snapshot forward PE during a late cycle fiscal stimulus would not be as indicative as a PE averaged over the business cycle. That's not saying cyclical adjustment transforms PE turns into a crystal ball, it's saying (IMO) that common sense would not place a lot of weight on earnings pretty darn likely to have a significant cyclical peak element to them. Again, various compositions of CAPE's might have only moderate correlations to 10yr subsequent returns, but that doesn't mean if over a particular data set who won the Super Bowl turned out to have a better correlation we'd say it was a comparable measure. One makes sense, the other one doesn't.

Any PE measure as indicator of E[r] has a direct connection to the equation Return=dividends+dividend growth+valuation change (with some correction for buybacks minus dilution either in 'dividend' or 'dividend growth'). Modest expected return flows from the fundamental of relatively low payout rate and assuming EPS growth=dividend growth at constant payout along a low economic growth trend, or else an ever increasing % of GDP would go to public stock company profits (in the long term past EPS growth has been significantly below GDP growth, though higher in the US in last few decades as profit as % of GDP has risen to multidecade highs). And the consensus GDP growth trend is low, where again consensus can be wrong, but we're talking expected return, not maximum possible return. Or there could be an unending tailwind of valuation increases such as has blown now for a few decades (ie not justifying today's CAPE, but relying on it to keep increasing).

But to reiterate the analogy to bonds, what the consensus of stock value measures (not unanimous, I again recommend the Hulbert column I referred to earlier if it can be accessed) tell me is that stock like bond expected returns are now lower than historic returns. Which does not mean there is a stock market crash coming soon, or isn't (I've no idea). It's just like the less debatable contention that bond expected returns are low. No crash or 'doom' is necessarily implied, though I guess there could be 'gloom' to some degree coming if realized returns are close to what I believe is the expected return. These debates sometimes make me think there should be another measure: the wished for return. :D

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

Post by FIREchief » Wed Aug 29, 2018 1:48 pm

JackoC wrote:
Wed Aug 29, 2018 12:08 pm
FIREchief wrote:
Tue Aug 28, 2018 2:38 pm
JackoC wrote:
Tue Aug 28, 2018 8:53 am
In absolute terms US stocks are expensive by almost every past measure, not every single one but almost all*.
If I count CAPE 10 based forecasts as "one" measure (which I do), then I will challenge your "almost all" statement. We've seen multiple examples within this thread of other measures that do not portray the gloom and doom of the CAPE 10 measures.
Thanks for the response. A lot to chew on here.
A possible problem with this debate is that people mean different things by 'expensive'. I do not mean 'gloom and doom'.

I think when a person who wants to FIRE plugs in the 2% to 4% ten year market real returns being forecast by the CAPE 10 crowd, and finds that they may now need to work five more years, that this may be approaching "doom and gloom." If MCS otherwise would predict an extremely low failure rate, they may have had an option to still FIRE but return to part time work or cut back on non-essentials which they now might not believe they still have.
My view of stock valuation is basically analogous. Most measures, not just CAPE10, show that US stocks are expensive in terms of the implied expected return.
To my original point, I'm just not seeing the examples of non-CAPE 10 measures that show the same level of "expensive." Certainly not "most" of the alternatives mentioned in this thread.
The ones which don't tend to be logically challenged as to why they should be indicative in terms of a long term expected return. Comparisons of *nominal* treasury yields to stock dividends don't make any sense, so that IMO eliminates that category of indicator. And also in IMO it's obvious why a snapshot forward PE during a late cycle fiscal stimulus would not be as indicative as a PE averaged over the business cycle. That's not saying cyclical adjustment transforms PE turns into a crystal ball, it's saying (IMO) that common sense would not place a lot of weight on earnings pretty darn likely to have a significant cyclical peak element to them.


This is hard to decipher. It seems to say that you are choosing to ignore measures that don't make sense to you, but embracing those that do. That's certainly fair, but hardly an argument against other approaches. Others may feel that blind acceptance of the concept of an over-arching "business cycle" or use of 10 year old data is illogical.
Modest expected return flows from the fundamental of relatively low payout rate and assuming EPS growth=dividend growth at constant payout along a low economic growth trend, or else an ever increasing % of GDP would go to public stock company profits (in the long term past EPS growth has been significantly below GDP growth, though higher in the US in last few decades as profit as % of GDP has risen to multidecade highs). And the consensus GDP growth trend is low, where again consensus can be wrong, but we're talking expected return, not maximum possible return. Or there could be an unending tailwind of valuation increases such as has blown now for a few decades (ie not justifying today's CAPE, but relying on it to keep increasing).
I've read this twice, but still not quite sure I understand what you are saying. First, are you using exclusively US GDP when you mention GDP growth? I'm sure you understand that even for 100% US companies, a large portion of their profits come from overseas. Also, doesn't the belief that only GDP growth will increase stock earnings preclude the possibility of productivity improvements? I can make my company more profitable (i.e. increase my profit margins, and thus earnings) without increasing sales by increasing productivity. Isn't that where a lot of our earnings growth has been coming from? Also, if earnings grow faster than price, then valuations will drop.
But to reiterate the analogy to bonds, what the consensus of stock value measures (not unanimous, I again recommend the Hulbert column I referred to earlier if it can be accessed) tell me is that stock like bond expected returns are now lower than historic returns.
Expert consensus has rarely had much meaning in the stock market.
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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willthrill81
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Re: Any metrics that say US Stocks are *NOT* expensive?

Post by willthrill81 » Wed Aug 29, 2018 8:46 pm

FIREchief wrote:
Wed Aug 29, 2018 1:48 pm
Expert consensus has rarely had much meaning in the stock market.
:thumbsup

Like virtually all of the supposed 'experts' telling us a year ago that stocks would only return 3-4% annually for the next decade. And in the last 12 months, the market is up over 17%. The rest of the decade could look really gloomy, but at a minimum, the experts were certainly off in their timing.
“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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