S&P 500 Forward P/E ratio - Are stocks highly valued?

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willthrill81
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Sat Sep 22, 2018 3:33 pm

For those who are saying that CAPE is somehow reasonable while putting down forward PE, let's take a look at both since 1990.

Here's a graph of CAPE from Shiller's site beginning at 1990. It's a little fuzzy because I just blew up the one from the site. It's good enough for this purpose.
Image

Here's forward PE since 1990.
Image

I haven't run a correlation between them, but they overlap quite a lot. So if you like CAPE, you shouldn't be too opposed to forward PE either. Obviously, forward PE is more volatile than CAPE, which it mathematically should, but this idea that forward PE is nothing more than a random shot in the dark isn't supported by this at all.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by BuyAndHoldOn » Sat Sep 22, 2018 3:39 pm

Interesting thread, thanks for posting.

Someone may have already said this: If "the market" (S&P 500 in this case) is reasonably efficient, the Forward Earnings should be ~ballpark reasonable. I base this on the fact that the companies that do give guidance are usually conservative, as stocks [particularly as of late] tend to be punished for missing "the numbers". I don't know enough about how Analysts do their estimates but presumably they are as informed as anyone else is (Although their crystal balls are just as cloudy).

I realize this system [estimated earnings] is far from perfect, but it does tell us *something*. It tells us *what the market is expecting* and what is being priced in.

And: we'll see what happens next :happy But if the S&P 500 really is trading at 16-times earnings: That's not bad at all, for the investor.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Sat Sep 22, 2018 9:40 pm

willthrill81 wrote:
Sat Sep 22, 2018 3:33 pm
For those who are saying that CAPE is somehow reasonable while putting down forward PE, let's take a look at both since 1990.

Here's a graph of CAPE from Shiller's site beginning at 1990. It's a little fuzzy because I just blew up the one from the site. It's good enough for this purpose.
Image

Here's forward PE since 1990.
Image

I haven't run a correlation between them, but they overlap quite a lot. So if you like CAPE, you shouldn't be too opposed to forward PE either. Obviously, forward PE is more volatile than CAPE, which it mathematically should, but this idea that forward PE is nothing more than a random shot in the dark isn't supported by this at all.
without a scale on your first graph, I can't conclude anything.

My problem with forward PE is when people compare it to a historical trailing PE. That drives me bonkers.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Sat Sep 22, 2018 9:44 pm

letsgobobby wrote:
Sat Sep 22, 2018 9:40 pm
willthrill81 wrote:
Sat Sep 22, 2018 3:33 pm
For those who are saying that CAPE is somehow reasonable while putting down forward PE, let's take a look at both since 1990.

Here's a graph of CAPE from Shiller's site beginning at 1990. It's a little fuzzy because I just blew up the one from the site. It's good enough for this purpose.
Image

Here's forward PE since 1990.
Image

I haven't run a correlation between them, but they overlap quite a lot. So if you like CAPE, you shouldn't be too opposed to forward PE either. Obviously, forward PE is more volatile than CAPE, which it mathematically should, but this idea that forward PE is nothing more than a random shot in the dark isn't supported by this at all.
without a scale on your first graph, I can't conclude anything.
The scale is on Shiller's site. I couldn't include it without including the rest of the graph, which entails a lot more data than is needed for this comparison.

Scale doesn't really matter in this comparison as much as magnitude. It's clear that CAPE and forward PE tended to move together fairly closely over this time period. Forward PE was somewhat high even for this period until not long ago, when projected earnings increased.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Sat Sep 22, 2018 10:18 pm

It's absurd to interpet a graph without a scale. I'm surprised you would suggest we try.

But I went to the multpl website and found that in 2000, CAPE was 44, or 300% of it's long term average. According to your graph, forward PE was 26, or maybe 160% of mean (using the line indicated on your graph). In the most expensive global stock market bubble of the last twenty years, and one of the most overvalued markts in modern world history, forward PE was only 50% above it's average. This is my problem with forward PE. No matter how high prices go, euphoric estimates of future earnings go up nearly as fast. It has no basis in reality, only psychology.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Sat Sep 22, 2018 10:44 pm

letsgobobby wrote:
Sat Sep 22, 2018 10:18 pm
But I went to the multpl website and found that in 2000, CAPE was 44, or 300% of it's long term average. According to your graph, forward PE was 26, or maybe 160% of mean (using the line indicated on your graph). In the most expensive global stock market bubble of the last twenty years, and one of the most overvalued markts in modern world history, forward PE was only 50% above it's average. This is my problem with forward PE. No matter how high prices go, euphoric estimates of future earnings go up nearly as fast. It has no basis in reality, only psychology.
So how many percent above 'long term average' matters (which long term average are you talking about anyway)? If you looked at the graph of forward PE, you would see that it too was far higher in 2000 than it had been just a few years prior. It was down around 13 in 1995 but spiked at 27 in 1999. And in 2009 it bottomed out just below 10.

At any rate, my point is merely that there isn't some big mystical long-lasting difference between CAPE and forward PE. They largely, though not entirely, resemble each other. Forward PE is just more erratic (some might call it responsive) than CAPE due to how both are calculated.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Sat Sep 22, 2018 10:59 pm

letsgobobby wrote:
Sat Sep 22, 2018 10:18 pm

But I went to the multpl website and found that in 2000, CAPE was 44, or 300% of it's long term average. According to your graph, forward PE was 26, or maybe 160% of mean (using the line indicated on your graph). In the most expensive global stock market bubble of the last twenty years, and one of the most overvalued markts in modern world history, forward PE was only 50% above it's average. This is my problem with forward PE. No matter how high prices go, euphoric estimates of future earnings go up nearly as fast. It has no basis in reality, only psychology.
I don't have much faith in either of these metric as a reliable predictor of future performance. But, based on what you indicated above, it seems forward PE was a much better indicator than CAPE. Here is my reasoning. During severe down turns, the correction typically overshoots the underlying "normal" valuation, which is partly why you typically see a sharp rebound. So, with forward PE being 160% of average, you would need a 38% correction to revert to mean, so including an overshooting correction, a 50ish% loss might be about expected. On the other hand, with CAPE being at 300%, you would need a 67% correction just to revert to mean, and more likely a 75% correction to account for the overshoot. Of the two, I think the actual correction (49%?) was much closer to what might have been "predicted" by forward PE.
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Siegel vs. Shiller: Is the Stock Market Overvalued?

Post by Jeff Albertson » Sun Sep 23, 2018 7:00 pm

from the Wharton web site, dated Sep 18, 2018:
Is the stock market overvalued and a bear market is long overdue, or are stocks still reasonably priced and more upside is yet to come?

To answer that question, Wharton finance professor Jeremy Siegel and Yale University economics professor Robert Shiller made their cases at the recent conference, “Financial Markets, Volatility and Crises: A Decade Later,” held in New York by Wharton’s Jacobs Levy Equity Management Center for Quantitative Financial Research. Siegel is often seen as a perennial bull and Shiller is viewed as ever the bear. The two, who have been friends since the late 1960s, often give opposing market outlook views separately on business television. It is rare for them to spar in person.
http://knowledge.wharton.upenn.edu/arti ... ck-market/

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Re: Siegel vs. Shiller: Is the Stock Market Overvalued?

Post by willthrill81 » Sun Sep 23, 2018 9:09 pm

Jeff Albertson wrote:
Sun Sep 23, 2018 7:00 pm
from the Wharton web site, dated Sep 18, 2018:
Is the stock market overvalued and a bear market is long overdue, or are stocks still reasonably priced and more upside is yet to come?

To answer that question, Wharton finance professor Jeremy Siegel and Yale University economics professor Robert Shiller made their cases at the recent conference, “Financial Markets, Volatility and Crises: A Decade Later,” held in New York by Wharton’s Jacobs Levy Equity Management Center for Quantitative Financial Research. Siegel is often seen as a perennial bull and Shiller is viewed as ever the bear. The two, who have been friends since the late 1960s, often give opposing market outlook views separately on business television. It is rare for them to spar in person.
http://knowledge.wharton.upenn.edu/arti ... ck-market/
From that article:
“You can see we’re not that high” based on the last 12 months of earnings. Siegel said. “We’re actually just in the low 20s there.” When calculated using this year’s earnings estimate, the PE drops to 18, and further dips to 16 when using 2019 estimated profits, based on the type of earnings he uses.
“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: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Wed Sep 26, 2018 9:12 am

willthrill81 wrote:
Fri Sep 21, 2018 4:48 pm
Here's a quick one. CAPE has been higher than its long-term average in the U.S. since 1992 (not many years after Shiller proposed CAPE), yet real returns since then have been slightly above average.
This fails. The question was "why is forward earnings better than CAPE", not why CAPE sucks. To extend, IIRC CAPE has a predictive power of 40% while forward earnings only has 20%. 2 more points here.

I can address the above concern - accounting standards have changed over the period. IIRC the change in amortization of goodwill was a big driver here. Same Cash Flow to Equities (i.e. economic returns) but a big change in earnings (i.e. accounting income).
willthrill81 wrote:
Sat Sep 22, 2018 3:33 pm
For those who are saying that CAPE is somehow reasonable while putting down forward PE, let's take a look at both since 1990.

Here's a graph of CAPE from Shiller's site beginning at 1990. It's a little fuzzy because I just blew up the one from the site. It's good enough for this purpose.
[snip picture]

Here's forward PE since 1990.
[snip picture]

I haven't run a correlation between them, but they overlap quite a lot. So if you like CAPE, you shouldn't be too opposed to forward PE either. Obviously, forward PE is more volatile than CAPE, which it mathematically should, but this idea that forward PE is nothing more than a random shot in the dark isn't supported by this at all.


While they may overlap a lot, they are going to have a very low correlation. As you have noted, CAPE is smooth while PE is jagged. As you suggest, PE is not a random shot in the dark. What your eye is doing is smoothing over the jagged edges. Oddly enough, this is what CAPE is doing - smoothing the edges. Which kind of suggests that you approve of CAPE??? Or if not CAPE than some other methodology to smooth the edges?

Going back to the original point, CAPE is a tool, a starting point. It is not a law or a end point. Know what you tools are capable of doing and what they can't.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Wed Sep 26, 2018 9:23 am

alex_686 wrote:
Wed Sep 26, 2018 9:12 am
To extend, IIRC CAPE has a predictive power of 40% while forward earnings only has 20%.

Going back to the original point, CAPE is a tool, a starting point. It is not a law or a end point. Know what you tools are capable of doing and what they can't.
To the first sentence, I think your tense is wrong. That 40% only holds if you include all the data Shiller used to data mine for this specific metric. I believe it has been quite a bit lower than that since it was first "discovered". Perhaps owing to some of the accounting changes you alluded to, or perhaps because it was just a random quirk in the historical data in 1996. I am not sure which is a bigger factor.

To the second sentence above, I agree with your assessment that it is simply an imperfect tool with its set of limitations, and should be used accordingly. The problem I see is that many people (see multiple threads running right now, as well as numerous articles/papers predicting lower returns) seem to be imbuing it with some kind of mystical forecasting ability and basing both short term asset allocation and/or longer term planning in reaction to current CAPE10 values. Often dis-regarding the accounting changes, or the big impact of 2008 drop in earnings.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by triceratop » Wed Sep 26, 2018 9:29 am

HomerJ wrote:
Fri Sep 21, 2018 6:56 pm
letsgobobby wrote:
Fri Sep 21, 2018 3:29 pm
As for forward earnings, I'll trust them when someone can tell me the temperature next week Friday at noon with any degree of certainty.
Do you really believe the last 10 years of next week Friday at noon temperatures will tell you exactly about next week Friday at noon temperatures?
I believe the last 10 years of next week Friday at noon temperatures will tell me more about next week Friday than any projection based solely on the temperature today.

I also don't think Forward PE is analogous to predicting next week's temperature based solely on the temperature today. How could it be? Prices are based on expectations of the future and if earnings were highly volatile over the past N years then price would have to adjust for the likelihood this risk will be realized in the future.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Wed Sep 26, 2018 9:32 am

marcopolo wrote:
Wed Sep 26, 2018 9:23 am
The problem I see is that many people (see multiple threads running right now, as well as numerous articles/papers predicting lower returns) seem to be imbuing it with some kind of mystical forecasting ability and basing both short term asset allocation and/or longer term planning in reaction to current CAPE10 values.
So let me counter, if not CAPE10 then what? For myself, I advocate CAPE10 because it is a good simple model that generates actionable predictions.

I know and use better models. They are propriety, they are complex, they require fiddly adjustments and subjective inputs. In short, not good for a general discussion on a public bulletin board.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Wed Sep 26, 2018 9:48 am

alex_686 wrote:
Wed Sep 26, 2018 9:32 am
marcopolo wrote:
Wed Sep 26, 2018 9:23 am
The problem I see is that many people (see multiple threads running right now, as well as numerous articles/papers predicting lower returns) seem to be imbuing it with some kind of mystical forecasting ability and basing both short term asset allocation and/or longer term planning in reaction to current CAPE10 values.
So let me counter, if not CAPE10 then what? For myself, I advocate CAPE10 because it is a good simple model that generates actionable predictions.

I know and use better models. They are propriety, they are complex, they require fiddly adjustments and subjective inputs. In short, not good for a general discussion on a public bulletin board.
I disagree with your premise that CAPE10 provides actionable predictions, at least not ones that are likely to improve your performance relative to simply ignoring it. If it is such a great tool to provide actionable intelligence, where are all the "CAPE1-based Asset Allocation" mutual funds/ETF that are clobbering the market? Do you think you are able to glean additional information out of it than all the people managing money professionally? I have no faith in my own ability to do so. Yet, none of them have been able to consistently utilize it to provide improved performance.

I can't really comment on your proprietary, complex model, with all of its fiddling, other than to say you are not the first person to believe they have figured out how to outsmart the market. Some actually manage to do it, perhaps you are in that small minority.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Wed Sep 26, 2018 10:09 am

marcopolo wrote:
Wed Sep 26, 2018 9:48 am
I disagree with your premise that CAPE10 provides actionable predictions, at least not ones that are likely to improve your performance relative to simply ignoring it. If it is such a great tool to provide actionable intelligence, where are all the "CAPE1-based Asset Allocation" mutual funds/ETF that are clobbering the market?
They are actually fairly plentiful. Think target date funds and pension funds. The point of CAPE10 is not to beat the market. I am not even actually sure how one would go about doing this with CAPE10. The point of CAPE10 is to generate estimates of expected equity returns over the next 10 years. You need that to figure out how much you should save. You need that to figure out your equity / bond allocations.

For example, CAPE10 is currently high so we would expect low forward returns. If your IPS calls for 7% to 10% returns for the next 10 years you may be disappointed.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Wed Sep 26, 2018 10:10 am

alex_686 wrote:
Wed Sep 26, 2018 10:09 am
marcopolo wrote:
Wed Sep 26, 2018 9:48 am
I disagree with your premise that CAPE10 provides actionable predictions, at least not ones that are likely to improve your performance relative to simply ignoring it. If it is such a great tool to provide actionable intelligence, where are all the "CAPE1-based Asset Allocation" mutual funds/ETF that are clobbering the market?
They are actually fairly plentiful. Think target date funds and pension funds. The point of CAPE10 is not to beat the market. I am not even actually sure how one would go about doing this with CAPE10. The point of CAPE10 is to generate estimates of expected equity returns over the next 10 years. You need that to figure out how much you should save. You need that to figure out your equity / bond allocations.

For example, CAPE10 is currently high so we would expect low forward returns. If your IPS calls for 7% to 10% returns for the next 10 years you may be disappointed.
I've not seen one target date fund that used CAPE or any other valuation metric to determine AA at any stage.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by alex_686 » Wed Sep 26, 2018 10:16 am

willthrill81 wrote:
Wed Sep 26, 2018 10:10 am
I've not seen one target date fund that used CAPE or any other valuation metric to determine AA at any stage.
Well, what metric do you think they use to determine the AA between bonds and equities? FYI, I have been in the room when these decisions have been made. They don't use CAPE10 but it is one of the ingredients that gets thrown into the pot.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by Valuethinker » Wed Sep 26, 2018 10:22 am

james22 wrote:
Sat Sep 22, 2018 10:27 am
Really doesn't matter what the chart says if forward P/E is not actually correlated with realized, subsequent market returns.

That the market takes forward P/E seriously is just a manifestation of Bogle's Iron Law of Investing: In the short run, speculative return drives the market. In the long run, investment return is all that matters.

What of this do you disagree with, Will?

... stocks are a claim to a long-term stream of cash flows that will actually be distributed to investors over time, and that this stream of cash flows cannot be estimated from a single year's earnings number.

The main reason for this is that profit margins vary from year-to-year over the business cycle, and tend to mean-revert over the long-term. Earnings (net and operating) tend to be depressed during periods of economic strain, but when they reflect compressed profit margins, they are strongly associated with above-average rates of subsequent growth over the following 7-10 years.

In contrast, earnings that reflect elevated profit margins are strongly associated with poor rates of subsequent growth. When analysts take earnings figures at face value, and presume to "capitalize" them simply by dividing by interest rates, they demonstrate a Kindergartener's grasp of securities valuation.


http://www.hussmanfunds.com/wmc/wmc100802.htm

RTM?

So reversion to the mean—RTM, the pervasive law of gravity that prevails in the financial markets—never stops. While its drumbeat is hardly regular, it never fails. For the returns of market sectors, of managed investment portfolios, and even of the market itself mysteriously return, over time, to norms of one kind or another.
Except they have not reverted.

Profits to GDP has been on pretty steady rise since about 1980 I believe. Dips in recesssions, yes, but the upward trend is clear.

Who is getting squeezed?

- debt holders
- workers

So the question is, if they are going to revert, then when? Now if you look at Unemployment Rate in USA. But if you look at Employment Rate 24-65, then US still has a lot of discouraged workers. So not yet.

The combination of deunionisation (only 11% of US workers are now members of a union), labour market deregulation and globalization of production seems to have fairly decisively moved the needle towards capital and away from labour.

You can see it in the stock prices. The PE is justified if we don't think that the needle will revert to historic means.

Note that this is not primarily a technology story. You can't see technology in productivity numbers the last 40 years (except towards the end of the 1990s). And when Apple or Amazon or Google deploy new technology to achieve profits growth, they tend to take that profit away from incumbents. That $1000 iphone is money the consumer does not spend on some other consumer goods & services. Amazon is having the same effect in retail. Google has destroyed conventional print based advertising models. The internet has cannibalized the music industry. TV may be the next to fall - Netflix, Amazon.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Wed Sep 26, 2018 10:41 am

alex_686 wrote:
Wed Sep 26, 2018 10:09 am
marcopolo wrote:
Wed Sep 26, 2018 9:48 am
I disagree with your premise that CAPE10 provides actionable predictions, at least not ones that are likely to improve your performance relative to simply ignoring it. If it is such a great tool to provide actionable intelligence, where are all the "CAPE1-based Asset Allocation" mutual funds/ETF that are clobbering the market?
They are actually fairly plentiful. Think target date funds and pension funds. The point of CAPE10 is not to beat the market. I am not even actually sure how one would go about doing this with CAPE10. The point of CAPE10 is to generate estimates of expected equity returns over the next 10 years. You need that to figure out how much you should save. You need that to figure out your equity / bond allocations.

For example, CAPE10 is currently high so we would expect low forward returns. If your IPS calls for 7% to 10% returns for the next 10 years you may be disappointed.
Are you suggesting that these target date funds out perform a simpler fixed allocation, or glide path strategy that ignores such valuation metrics?
I have not seen much evidence of that, do you have a reference?

I have never based how much i should save/invest on what the valuation of equities were at any given time, that seems like a really odd suggestion. When CAPE10 got relatively low in 2009, I was supposed to save/invest less? That seemed like a great time to save/invest more.

I also see no reason to use it to figure out my equity/bond allocation. By keeping a pre-defined AA trajectory, I am already reducing equity holding when they outperform (rebalancing). I see no reason to go even further by reducing equity allocation.

I am not planning for 7% to 10% returns. My plan works pretty well with a 0% real return for my portfolio. So, As Homer J likes to point out, I always plan for the possibility of lower returns. Because it is always possible, regardless of what the valuation metrics say. Even if you believe CAPE10 to have 40% predictive power, if CAPE10 was "low", would you plan your future around 10% return based on that? I know I would not.
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by Taylor Larimore » Wed Sep 26, 2018 10:49 am

willthrill81 wrote:I've not seen one target date fund that used CAPE or any other valuation metric to determine AA at any stage.
You are right. Vanguard had an "Asset-Allocation" fund when I began investing in Vanguard in 1986. The fund also became part of their target series. The fund attempted to forecast winning categories. The AA fund was closed after many years of disappointing results.

Best wishes.
Taylor
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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by michaeljc70 » Wed Sep 26, 2018 12:05 pm

20 years is not a lot of data. It includes two recessions (one of which was a financial crisis). I wouldn't conclude much from that.

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Re: Are stocks highly valued?

Post by dh » Wed Sep 26, 2018 12:14 pm

Taylor Larimore wrote:
Fri Sep 21, 2018 10:27 am
Are stocks highly valued?
willthrill81:

There are many ways to value stocks. It doesn't matter to me.

I avoid market-timing and stay-the-course.

Best wishes.
Taylor
I truly appreciate Taylor's response. It seems that as long-term investors, we own stocks when markets are "high" and we own stocks when markets are "low." Acknowledging that fact seems consistent with being a satisficer, rather feebly attempting to become a maximizer (attempting to guess when to be in or out of the market). Thank you, Taylor for your steady words of encouragement.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by garlandwhizzer » Wed Sep 26, 2018 12:38 pm

Forward PE is a marketing tool used primarily to increase stock sales. Forward PE estimates are produced by analysts whose corporate income stream is ultimately derived from equity sales. They typically see the glass as at least half full unless its dry. Backtesting of the accuracy of forward PE demonstrates a systematic and persistent trend to overestimate what earnings are going to be. The problem doesn't stop there however. Although the estimates are essentially always overoptimistic there is a wide range when it comes to how overoptimistic. I believe forward PEs are essentially useless for making investment decisions. I also believe that PE 10 has very limited predictive value in the short term but does have some predictive value over the next 10 year period, not perfect but likely better than any other market parameter. Nothing gives completely reliable market predictions over any time frame.

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Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by willthrill81 » Wed Sep 26, 2018 3:00 pm

alex_686 wrote:
Wed Sep 26, 2018 10:16 am
willthrill81 wrote:
Wed Sep 26, 2018 10:10 am
I've not seen one target date fund that used CAPE or any other valuation metric to determine AA at any stage.
Well, what metric do you think they use to determine the AA between bonds and equities? FYI, I have been in the room when these decisions have been made. They don't use CAPE10 but it is one of the ingredients that gets thrown into the pot.
Based on what Vanguard at least has done, it seems to have nothing to do with expectations of future returns and everything to do with maintaining a glidepath based in large part on the prior volatility of stocks and bonds.
“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

letsgobobby
Posts: 11596
Joined: Fri Sep 18, 2009 1:10 am

Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by letsgobobby » Wed Sep 26, 2018 3:59 pm

marcopolo wrote:
Wed Sep 26, 2018 9:23 am
To the second sentence above, I agree with your assessment that it is simply an imperfect tool with its set of limitations, and should be used accordingly. The problem I see is that many people (see multiple threads running right now, as well as numerous articles/papers predicting lower returns) seem to be imbuing it with some kind of mystical forecasting ability and basing both short term asset allocation and/or longer term planning in reaction to current CAPE10 values. Often dis-regarding the accounting changes, or the big impact of 2008 drop in earnings.
You are contradicting yourself. If indeed we should use CAPE at all, I agree it should simply be one tool. This implies other factors need to be considered. Yet your last sentence implies that taking other factors into account means adherents aren't being purists.

It's a tool. I won't hold the same equity exposure when stocks are at record high valuations and at record low valuations. Exactly how much I should or shouldn't hold depends on a variety of factors.

Keep in mind this "radical" model has led me to make exactly zero changes in my allocation since the fall of 2009.

marcopolo
Posts: 1132
Joined: Sat Dec 03, 2016 10:22 am

Re: S&P 500 Forward P/E ratio - Are stocks highly valued?

Post by marcopolo » Wed Sep 26, 2018 4:07 pm

letsgobobby wrote:
Wed Sep 26, 2018 3:59 pm
marcopolo wrote:
Wed Sep 26, 2018 9:23 am
To the second sentence above, I agree with your assessment that it is simply an imperfect tool with its set of limitations, and should be used accordingly. The problem I see is that many people (see multiple threads running right now, as well as numerous articles/papers predicting lower returns) seem to be imbuing it with some kind of mystical forecasting ability and basing both short term asset allocation and/or longer term planning in reaction to current CAPE10 values. Often dis-regarding the accounting changes, or the big impact of 2008 drop in earnings.
You are contradicting yourself. If indeed we should use CAPE at all, I agree it should simply be one tool. This implies other factors need to be considered. Yet your last sentence implies that taking other factors into account means adherents aren't being purists.

It's a tool. I won't hold the same equity exposure when stocks are at record high valuations and at record low valuations. Exactly how much I should or shouldn't hold depends on a variety of factors.

Keep in mind this "radical" model has led me to make exactly zero changes in my allocation since the fall of 2009.
I was just pointing out a couple of reasons why the tool is even more imperfect than it was when it was first data mined into existence.
I see little value in using it as a forecasting tool to set my AA, but as i said before, if it works for you, that is all that matters.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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