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.