Howard Marks On Bubble Watch

[AdrianC]

Latest memo:

https://www.oaktreecapital.com/insights ... bble-watch

TL;DR - look at the chart at the end.

The graph, from J.P. Morgan Asset Management, has a square for each month from 1988 through late [2014], meaning there are just short of 324 monthly observations (27 years x 12). Each square shows the forward p/e ratio on the S&P 500 at the time and the annualized return over the subsequent ten years. The graph gives rise to some important observations:

There’s a strong relationship between starting valuations and subsequent annualized ten-year returns. Higher starting valuations consistently lead to lower returns, and vice versa. There are minor variations in the observations, but no serious exceptions.

Today’s p/e ratio is clearly well into the top decile of observations.

In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%.

Actionable? Sure...have low expectations.

[Tib]

J.P. Morgan's graph is depressing, especially for retirees.

[h82goslw]

Because of what I’ve learned on Bogleheads I’ve been using 3% real for my projections of what I’ll have at retirement. I hate that this article confirms it may be too high.

[mary1969]

It's been an amazing run for USA the past 16 years. The party can't go on forever. I believed in America in 2009. Today i am not so certain.

Perhaps Pride Before the Fall for the good old USA. My guess is bonds and international equities will be the shiny stars the next 10 years. I'll keep my allocation 50/50 (20%international equity) and a withdrawal rate of less than 2%.

[NatureBoy]

In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%.[/i]

Actionable? Sure...have low expectations.

Real or nominal returns of +/- 2%?

[chlomag]

I don't have the time to recreate the chart presented but, based on a skeptical check, throughout 2014 the S&P 500 forward P/E ratio was about 19 & the subsequent 10 year annual return exceeded 10% but I don't see any "observations" reflecting that; however, maybe that is why the data is presented as "late 2014" as the end point (i.e. subsequent months do not support the presentation). If one were to accept the chart, it would appear that whenever the S&P 500 P/E exceeded 17 it would be a clear warning.

[BenS]

The plot the OP mentions is misleading.

It is not 324 independent observations. The plot shows between three and four independent [(2024-1988)/10 =3.6] samples with an additional ~320 highly correlated data points with a bit of noise. I would expect to perceive a trend in this plot, because there isn't really much independent data/samples being plotted. If we broke the time between 'samples' to one week, would we have 324 * 4 = 1296 samples? Don't think so...

Moreover, each of these few samples was taken over a period of generally declining interest rates. A review of the Dividend Discount Model / Gordon equation shows that with a decreasing risk-free rate we expect the price (per unit of earnings) to increase.

Unless you have a high degree of conviction that the next ten years will be well represented by a ten year period over the previous ~30 years this plot should be disregarded. Nothing actionable.

[ranger3]

Basically that graph is saying if you bought stocks during the dot com froth, your numbers didn’t look so good in 2008 and 2009. Not exactly revolutionary and not what I would consider much of a track record, though I would generally agree with your point that it would be wise for accumulators today to not base their plan on the real returns we have seen over the last decade continuing.

[LadyGeek]

This thread has run its course and is locked (general economic discussion). As noted in the site owner's post in the locked thread Re: U.S. stocks in free fall:

A reminder from the forum policies:

Investing - Theory, News & General

If it's investment related and it doesn't fall into the above category it goes here.

General economic discussions do not fall under the category of "investment related". Nor do they fall under the allowed topics in any of our other forums. You will have to find another site or outlet if you wish to take part in such discussions.

Just in case the previous was unclear, we specifically addressed this issue in the following policy:

Non-actionable (Trolling) Topics

If readers can't do anything with the content of a topic other than argue about it, it does not belong here. Examples include:

• US or world economic, political, tax, health care and climate policies
• conspiracy theories of any type
• discussions of the crimes, shortcomings or stupidity of other people, whether they be political figures, celebrities, CEOs, Fed chairmen, subprime mortgage borrowers, lottery winners, federal "bailout" recipients, poor people, rich people, etc. Of course, you are welcome to talk about the stupid financial things you have done.

[AdrianC]

[Post merged into here --admin LadyGeek]

Shiller PE has ascended to nearly 37 39, which was exceeded only in 1999 and 2021 after which kaput. Concerning.. maybe time to lighten up?

@RationalWalk, do you have any thoughts on the recent Howard Marks memo?
25 years ago he called the dot-com bust. Here he is again with a word of caution.

[hiddenpower]

Shiller PE has ascended to nearly 37 39, which was exceeded only in 1999 and 2021 after which kaput. Concerning.. maybe time to lighten up?

@RationalWalk, do you have any thoughts on the recent Howard Marks memo?
25 years ago he called the dot-com bust. Here he is again with a word of caution.

Can you link it? Within the past few weeks I saw a video where he mentioned valuations are high but he wouldn't sell or anything.

[LadyGeek]

AdrianC - I merged your post (and a reply) into the ongoing discussion.

The thread remains locked. See: Locked Topics

if a topic is locked, please do not start up another thread to continue the discussion...

[babystep]

[Thread merged into here --admin LadyGeek]

Thoughts?



Source:
https://www.oaktreecapital.com/insights ... bble-watch

The graph, from J.P. Morgan Asset Management, has a square for each month from 1988 through late 2014, meaning there are just short of 324 monthly observations (27 years x 12). Each square shows the forward p/e ratio on the S&P 500 at the time and the annualized return over the subsequent ten years. The graph gives rise to some important observations:

There’s a strong relationship between starting valuations and subsequent annualized ten-year returns. Higher starting valuations consistently lead to lower returns, and vice versa. There are minor variations in the observations, but no serious exceptions.

Today’s p/e ratio is clearly well into the top decile of observations.

In that 27-year period, when people bought the S&P at p/e ratios in line with today’s multiple of 22, they always earned ten-year returns between plus 2% and minus 2%.

In November, a couple of leading banks came out with projected ten-year returns for the S&P 500 in the low- to mid-single digits. The above relationship is the reason. It shouldn’t come as a surprise that the return on an investment is significantly a function of the price paid for it. For that reason, investors clearly shouldn’t be indifferent to today’s market valuation.

You might say, “making plus-or-minus-2% wouldn’t be the worst thing in the world,” and that’s certainly true if stocks were to sit still for the next ten years as the companies’ earnings rose, bringing the multiples back to earth. But another possibility is that the multiple correction is compressed into a year or two, implying a big decline in stock prices such as we saw in 1973-74 and 2000-02. The result in that case wouldn’t be benign.

The above are the things to worry about. Here are the counterarguments:

the p/e ratio on the S&P 500 is high but not insane,

the Magnificent Seven are incredible companies, so their high p/e ratios could be warranted,

I don’t hear people saying, “there’s no price too high;” and

the markets, while high-priced and perhaps frothy, don’t seem nutty to me.


* * *

As I said at the start of this memo, I’m not an equity investor, and I’m certainly no expert on technology. Thus, I can’t speak authoritatively about whether we’re in a bubble. I just want to lay out the facts as I see them and suggest how you might think about them . . . just as I did 25 years ago.

I hope you’ll keep reading for the next 25!

January 2, 2025

[nisiprius]

Already discussed here. The thread was locked as being a "general economic discussion."

[rkhusky]

Already discussed here. The thread was locked as being a "general economic discussion."

And this post from that thread is pertinent:
viewtopic.php?p=8196799#p8196799

There aren’t many independent data points in the data, perhaps 3 or 4.

[babystep]

Really disappointing that we locked the topic. I would have loved to hear the thoughts of experts on his analysis.

[rkhusky]

Wonder what the chart would look like with 5 or 10 years between points, ie more independent points?

[UpperNwGuy]

Really disappointing that we locked the topic. I would have loved to hear the thoughts of experts on his analysis.

Did you read the pertinent post?

[babystep]

Really disappointing that we locked the topic. I would have loved to hear the thoughts of experts on his analysis.

Did you read the pertinent post?

Which one specifically?

[babystep]

It doesn't make sense to me. Let us say p/e is 25. If earnings grow 7% as assumed there.

p/e is 25. Earnings is 4. Price is 100.

In 3 years it goes to 20.

20 = 100 / (4 * (1.07) ^ 3)

In 6 years it goes to 16.

16 = 100 / (4 * (1.07) ^ 6)

I wonder how chart looks if it goes back more than 1988.

[UpperNwGuy]

Did you read the pertinent post?

Which one specifically?

The one rkhusky put at the top of the screen when you click on his link. The poster is BenS.

[LadyGeek]

I merged babystep's thread into the ongoing discussion. The thread remains locked for the reason stated previously.

This thread has run its course and is locked (general economic discussion). As noted in the site owner's post in the locked thread Re: U.S. stocks in free fall:

A reminder from the forum policies:



General economic discussions do not fall under the category of "investment related". Nor do they fall under the allowed topics in any of our other forums. You will have to find another site or outlet if you wish to take part in such discussions.

Just in case the previous was unclear, we specifically addressed this issue in the following policy: