Thesaints wrote: ↑
Fri May 24, 2019 12:10 am
SovereignInvestor wrote: ↑
Thu May 23, 2019 11:56 pm
That remark about inflation is irrelevant. You're using a number that doesn't reflect inflation by only referencing real GDP. Whether there's high or low ibflation is irrelevant I assume 2% real GDP growth so nominal GDP grows 2% above inflation.
I did not mention inflation at all.
There seems to be mischaracterization of buybacks. Buyback is like a dividend. So yes when a the S&P consistently pays out such little profit in dividend that it buys back 3% of the shared annually as it has on average since 2005, then yes the earnings per share will grow 3% faster than total nominal earnings grow.
It is not expanding profits...only on a per share basis. If they paid the 3% in extra dividend then investors can get 3% more shares if they reinvest...instead each share produces 3% more profit. Dividend versus buyback is irrelevant....math is the same.
The math is that if they pay 2% in dividends and another 3% in buyback, earnings have to grow more than 5%, otherwise there is no space for expansion.
You're using TTM pE...the same PE that was like 50 in 2009 and sky high in 2017 and was backward looking and said avoid stocks before the biggest rallies we've seen.
Yes, in 2009 the denominator was close to zero.
Maybe you don't understand my point. I'm saying that we can't exclude P/E might be around 15 in 2029; who can tell ? In that case the next decade annualized return might very well be under 4%.
The market prices for the future. Forward operating PE is much better...yes it's biased high due to optimism but it always has the bias so relative comparisons across time are useful.
That's nice. Too bad future earnings are not known.
Not everything is 1999 or a bubble...
Talking about 1999, then the forward PE on the S&P was 25 and one can park cash in 10Y T bonds and get 6%.
Now the forward PE is 16 and 10Y bonds onpy offer 2.3%. The suggestion that the current valuations is remotely similar to 1999 is just way off base.
In fact, I'm not making it.
Yes of course valuations can go to 2012 low levels...great point. But average forward PE since 19995 is 17. The lowest period was 2008 to 2012. From 1995 to present it ranged from 10 to 25. In 2012 it was 12...that is on the low side. For every 2012 PE of 12 there can also be a 22 PE which is near the top end and that would mean the market trades 40% above current level.
Are you saying that we will never see a P/E under 15 ? It sounds like a very bold prediction.
[quoteIMO the only reason why valuations got so low in 2008-12 is from.fianncial criss and mean reversion because they went sky high in 1998-2001 and over corrected on downside.
It corrected 10 years later ???
2008 had nothing to do with 1998
Yes your post not only mentioned inflatiron it tried to criticize mine for making it seem like higher inflation is better. Your post mentioned hyperinflation.
Not true with earnings having to grow over 5%, yes that is if we get 4% annual PE contraction but you're assuming we contract to a very low PE.
Yes of course a 2012 PE can occur. But we are talking midpoint returns. I am just saying I believe Vanguard middle range returns are too low. When making a forecast of course the ending PE has huge impact but for the mid range you'd generally pick an average PE to end and 2012 is well below average so that should likely be a lower percentIle forecast.
If we are going to take extreme PE reading as midpoint I might as well say I expect -20% returns because the S&P can end at a PE of 1. It can happen but in terms of median range, the average forward PE Of last 25 years is above where it is today and those years reflected higher interest rates. So picking any significant PE contraction as mid point seems biased. Vanguard is doin that.
Assuming an ending PE of 12 as mid point estimate seems just as extreme as using a ending PE of 23.
Use TTM PE at ones own peril. It's not just 2009...it was 2017 as well. While TTM PE people say a High PE...the market looked ahead to a rebound from slowdown and massive tax cuts that led to 23% EPS growth for 2018.
The criticism makes it seem like I'm saying I have a crystal ball. Not at all...the forward PE is far from perfect but it is much better than looking backward.
Going into both 2017 and 2009 the trailing PE was very high. And didn't indicate the massive rebound in earnings that forward estimates did. The forward looking one has issues because although revisions are usually down over time in forward earnings they are not of same.magnitude but it is better than looking in rearview mirror.
As far as valuations since 1995..I said that is my opinion and cannot be totally proven. The logic is people respond to sentiment and chase returns and recency bias. In late 1990 valuatons were in bubble and then it crashed and in 2008 financial crisis people panicked and sold them off super low levels sonce they had recent bad experience in 2001-02. It happens a lot that once something is bubble it crashes below fair value. I mean the S&P arguably did it in 1970s...some say it was elevated in late 1960s with Nifty Fifty it crashed in 1973-4, and got more reasonable and then in 1980ish crash it became very cheap.
Oil as well....I think many would say 100+/Barrel was a bubble for most of 2012-14 but then it crashed to 26...seemed way below a normal price.