US stocks at most expensive relative to bonds since dotcom era

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InvestInPasta
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US stocks at most expensive relative to bonds since dotcom era

Post by InvestInPasta »

US equities have soared to their most expensive level relative to government bonds in a generation, amid growing nervousness among some investors over high valuations of megacap technology companies and other Wall Street stocks.
A record-breaking run for US equities, which hit a fresh high on Wednesday, has pushed the so-called forward earnings yield — expected profits as a percentage of stock prices — on the S&P 500 index down to 3.9 per cent, according to Bloomberg data. A sell-off in Treasuries has driven 10-year bond yields up to 4.65 per cent.
That means the difference between the two, a measure of the so-called equity risk premium, or the extra compensation to an investor for the risk of owning stocks, has fallen into negative territory and reached a level last seen in 2002 during the dotcom boom and bust.
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Full article: https://www.ft.com/content/f8b6dbb5-eb9 ... c9b2925bb3

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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Nathan Drake »

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Re: US stocks at most expensive relative to bonds since dotcom era

Post by ClassII »

My common beef against articles like that is when you compare the stock market today from some time in the past you're assuming everything being equal. No, this isn't a "this time it's different" argument, necessarily. But consider that the world is very, very different than it was in 2000. Not just from a tech standpoint but business and the market itself. Far fewer companies offer dividends and way more people have 401k's. So shouldn't it stand to reason the stock market might work a bit differently?

Take it a bit more extreme compare today to, say, 1955. The stock market ran completely differently back then, so why should we measure ourselves against that? You wouldn't say a modern car is wildly unsafe driving at 60mph because a Model T would fly apart at that speed.

"This time is different" usually applies to short term trends like "AI will make the Dow reach 150k in 2 years!" but shouldn't be used to waive away long term macro trends. Perhaps US stocks are just going to run more expensive than they did in the past due to X, Y, and Z?

Point ultimately is, I have no freakin' clue. I try not to let articles like this sway me because simply applying the rules of thumb to the past to the realities of today's market is a fool's errand. The one rule that seems to stand up to time is just sticking to a long-term investing plan and let economic progress carry the day with a broad index fund.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by steadyosmosis »

InvestInPasta wrote: Tue Jan 28, 2025 2:56 pm
US equities have soared to their most expensive level relative to ... and reached a level last seen in 2002 during the dotcom boom and bust.
Not actionable for me.
The amount of dollars I have invested in US stocks is too much to Invest In Pasta.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by secondopinion »

For me, I have already done a reduction of stocks to the lowest point I feel comfortable with; it is a great time to assess emotions.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by jebmke »

secondopinion wrote: Tue Jan 28, 2025 5:07 pm For me, I have already done a reduction of stocks to the lowest point I feel comfortable with; it is a great time to assess emotions.
yes; people need to spend at least as much time considering their behavioral risk as they do squeezing the eagle on portfolio analytics.

In 2005 when I was contemplating ER, wife and I spent quite a bit of time on behavioral risks once we determined the pile was large enough
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by markjk »

The 10 year projection for stocks is still positive. There are just more and more projections indicating stocks may not be the big winner they've been over the past 15 years or so. This seems reasonable when looking at how things have played out, especially over the last five years. Bonds have been crushed and interest rates have finally bounced back. Stocks are expensive historically speaking. There is no debating that. However, that doesn't mean there will be a crash. It could mean they trade sideways for a few years while bonds and international might see a resurgence. That's really all this is saying. In the end, it's just projections and taking action based on projections is market timing. Find an asset allocation and stick to it. Avoid the noise.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by secondopinion »

ClassII wrote: Tue Jan 28, 2025 3:09 pm My common beef against articles like that is when you compare the stock market today from some time in the past you're assuming everything being equal. No, this isn't a "this time it's different" argument, necessarily. But consider that the world is very, very different than it was in 2000. Not just from a tech standpoint but business and the market itself. Far fewer companies offer dividends and way more people have 401k's. So shouldn't it stand to reason the stock market might work a bit differently?

Take it a bit more extreme compare today to, say, 1955. The stock market ran completely differently back then, so why should we measure ourselves against that? You wouldn't say a modern car is wildly unsafe driving at 60mph because a Model T would fly apart at that speed.

"This time is different" usually applies to short term trends like "AI will make the Dow reach 150k in 2 years!" but shouldn't be used to waive away long term macro trends. Perhaps US stocks are just going to run more expensive than they did in the past due to X, Y, and Z?

Point ultimately is, I have no freakin' clue. I try not to let articles like this sway me because simply applying the rules of thumb to the past to the realities of today's market is a fool's errand. The one rule that seems to stand up to time is just sticking to a long-term investing plan and let economic progress carry the day with a broad index fund.
I think earnings yield refers to earnings and not the dividend. It is a P/E argument. Given that real yields are reasonable, I have adjusted my portfolio to have some more bonds and TIPS. I still hold stocks because there is still some safety not having all my portfolio in fixed-income.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Wanderingwheelz »

I did some poking around on the internet and found this category called “international”. Turns out, you don’t have to buy US stocks at all.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by secondopinion »

jebmke wrote: Tue Jan 28, 2025 5:12 pm
secondopinion wrote: Tue Jan 28, 2025 5:07 pm For me, I have already done a reduction of stocks to the lowest point I feel comfortable with; it is a great time to assess emotions.
yes; people need to spend at least as much time considering their behavioral risk as they do squeezing the eagle on portfolio analytics.

In 2005 when I was contemplating ER, wife and I spent quite a bit of time on behavioral risks once we determined the pile was large enough
Right. I find that volatility either way actually makes me nervous; not knowing the outcome is distressing.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by grok87 »

Wanderingwheelz wrote: Tue Jan 28, 2025 5:20 pm I did some poking around on the internet and found this category called “international”. Turns out, you don’t have to buy US stocks at all.
lol.
REITS are also fairly priced right now according to Greenstreet
https://www.greenstreet.com/insights/avgpremnav
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Silverado »

They are so expensive I am going to buy more in the coming week. Same as I did in the dotcom era. I’ll buy them at any and all prices. I need some US stocks to buy food in 2050, might as well get to buying them so I will be ready. If I needed to sell anything today to buy food, those shares from 2000 are in good shape for doing that.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by toddthebod »

The S&P 500 has returned 600% since the dot com peak, about 7.5%/year. I think we'll be okay.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by rockstar »

So what's the OP prediction on when the market will crash?

All I can do is keep buying since I have no clue when this will have an impact.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by InvestInPasta »

rockstar wrote: Tue Jan 28, 2025 6:36 pm So what's the OP prediction on when the market will crash?

All I can do is keep buying since I have no clue when this will have an impact.
I don't make predictions, I'm not Stanley Druckenmiller.
I haven't written the article, I was just curious about what everyone thinks of it.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by watchnerd »

I'm not putting any new money into stocks.

My equity allocation is the lowest it's ever been.

My TIPS collection keeps going up, as does my IG/HY bonds.
Last edited by watchnerd on Wed Jan 29, 2025 12:42 am, edited 1 time in total.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by watchnerd »

Silverado wrote: Tue Jan 28, 2025 6:01 pm I’ll buy them at any and all prices.
Really?

What if bonds are yielding ~7% and stocks have a PE >40?

That's what we had in Feb, 2000 at end of dotcom bubble.

If you had bought 10 YR bonds at that time, your bonds would have smoked stocks during the subsequent Lost Decade.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by InvestInPasta »

watchnerd wrote: Wed Jan 29, 2025 12:35 am I'm not putting any new money into stocks.

My equity allocation is the lowest it's ever been.

My TIPS collection keeps going up, as does my IG/HY bonds.
According to your signature you have 78% in equity.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by watchnerd »

InvestInPasta wrote: Wed Jan 29, 2025 12:57 am
watchnerd wrote: Wed Jan 29, 2025 12:35 am I'm not putting any new money into stocks.

My equity allocation is the lowest it's ever been.

My TIPS collection keeps going up, as does my IG/HY bonds.
According to your signature you have 78% in equity.
That's the Risk Portfolio.

Read the right side of the signature.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Silverado »

watchnerd wrote: Wed Jan 29, 2025 12:40 am
Silverado wrote: Tue Jan 28, 2025 6:01 pm I’ll buy them at any and all prices.
Really?

What if bonds are yielding ~7% and stocks have a PE >40?

That's what we had in Feb, 2000 at end of dotcom bubble.

If you had bought 10 YR bonds at that time, your bonds would have smoked stocks during the subsequent Lost Decade.
Yes really. I bought stocks throughout that lost decade (which of course was not a lost decade at the time, it was just the current market). I am not interested in running around trying to find something that will smoke other things. I have made the leap of faith that over the long term, the stock market will go up. So I buy as many stocks as I can, and I use an intermediate bond fund to temper the volatility a bit. And most importantly for me, I never worry about the purchases in the past. Can’t undo anything, so move on.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Nathan Drake »

Silverado wrote: Wed Jan 29, 2025 8:26 am
watchnerd wrote: Wed Jan 29, 2025 12:40 am

Really?

What if bonds are yielding ~7% and stocks have a PE >40?

That's what we had in Feb, 2000 at end of dotcom bubble.

If you had bought 10 YR bonds at that time, your bonds would have smoked stocks during the subsequent Lost Decade.
Yes really. I bought stocks throughout that lost decade (which of course was not a lost decade at the time, it was just the current market). I am not interested in running around trying to find something that will smoke other things. I have made the leap of faith that over the long term, the stock market will go up. So I buy as many stocks as I can, and I use an intermediate bond fund to temper the volatility a bit. And most importantly for me, I never worry about the purchases in the past. Can’t undo anything, so move on.
Luckily, the US stock market is not the only stock market you can invest in

ERP much higher abroad
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by dogagility »

I put 30% of our equity allocation in total international last fall. Plan to maintain that forever and ever.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by valleyrock »

:|
Nathan Drake wrote: Tue Jan 28, 2025 3:04 pm TINA has become TARA
As in Gone With the Wind?
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by folkher0 »

Silverado wrote: Wed Jan 29, 2025 8:26 am
watchnerd wrote: Wed Jan 29, 2025 12:40 am

Really?

What if bonds are yielding ~7% and stocks have a PE >40?

That's what we had in Feb, 2000 at end of dotcom bubble.

If you had bought 10 YR bonds at that time, your bonds would have smoked stocks during the subsequent Lost Decade.
Yes really. I bought stocks throughout that lost decade (which of course was not a lost decade at the time, it was just the current market). I am not interested in running around trying to find something that will smoke other things. I have made the leap of faith that over the long term, the stock market will go up. So I buy as many stocks as I can, and I use an intermediate bond fund to temper the volatility a bit. And most importantly for me, I never worry about the purchases in the past. Can’t undo anything, so move on.
I agree with Silverado. So many think the lesson learned from the dotcom era was to avoid investing into an overvalued market. Unless you are an exquisite market time, I think that is the wrong lesson. As long as you are taking on appropriate risk, and your investment horizon in equities is long, the lesson I learned is to continue to buy at regular intervals, and not to time the market based on P/E or other metrics.

The "lost decade" was only lost for investments made around the year 2000 and withrawn around the year 2010. If you invested regularly before and after the crash, and your horizon was longer than 10 years, you ought to have done just fine.

Even if you could know you are in a bubble, you can't know for sure when it will pop, and what else will pop with it.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by rockstar »

folkher0 wrote: Wed Jan 29, 2025 11:01 am
Silverado wrote: Wed Jan 29, 2025 8:26 am

Yes really. I bought stocks throughout that lost decade (which of course was not a lost decade at the time, it was just the current market). I am not interested in running around trying to find something that will smoke other things. I have made the leap of faith that over the long term, the stock market will go up. So I buy as many stocks as I can, and I use an intermediate bond fund to temper the volatility a bit. And most importantly for me, I never worry about the purchases in the past. Can’t undo anything, so move on.
I agree with Silverado. So many think the lesson learned from the dotcom era was to avoid investing into an overvalued market. Unless you are an exquisite market time, I think that is the wrong lesson. As long as you are taking on appropriate risk, and your investment horizon in equities is long, the lesson I learned is to continue to buy at regular intervals, and not to time the market based on P/E or other metrics.

Even if you could know you are in a bubble, you can't know for sure when it will pop, and what else will pop with it.
The other bit forgotten was that bond yields back then were also much higher. And then we got a weakening dollar as well. The 10 year bond had over a 6% nominal yield. Of course, you would have done good in bonds back then. Bond yields also dropped from those high yields too. By the end of 2009, they were at about 3%. That’s a nice gain on top of the yield.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by folkher0 »

rockstar wrote: Wed Jan 29, 2025 11:15 am
folkher0 wrote: Wed Jan 29, 2025 11:01 am

I agree with Silverado. So many think the lesson learned from the dotcom era was to avoid investing into an overvalued market. Unless you are an exquisite market time, I think that is the wrong lesson. As long as you are taking on appropriate risk, and your investment horizon in equities is long, the lesson I learned is to continue to buy at regular intervals, and not to time the market based on P/E or other metrics.

Even if you could know you are in a bubble, you can't know for sure when it will pop, and what else will pop with it.
The other bit forgotten was that bond yields back then were also much higher. And then we got a weakening dollar as well. The 10 year bond had over a 6% nominal yield. Of course, you would have done good in bonds back then. Bond yields also dropped from those high yields too. By the end of 2009, they were at about 3%. That’s a nice gain on top of the yield.
Like i said, as long as you are taking on appropriate risk and your investment horizon is long. The "appropriate risk" component of that sentence implies not being 100% equities unless your risk tolerance is exceptionally high. So you own stocks and bonds or something else.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by rockstar »

folkher0 wrote: Wed Jan 29, 2025 11:24 am
rockstar wrote: Wed Jan 29, 2025 11:15 am

The other bit forgotten was that bond yields back then were also much higher. And then we got a weakening dollar as well. The 10 year bond had over a 6% nominal yield. Of course, you would have done good in bonds back then. Bond yields also dropped from those high yields too. By the end of 2009, they were at about 3%. That’s a nice gain on top of the yield.
Like i said, as long as you are taking on appropriate risk and your investment horizon is long. The "appropriate risk" component of that sentence implies not being 100% equities unless your risk tolerance is exceptionally high. So you own stocks and bonds or something else.
Just as long as your low risk portion of your portfolio is actually low risk.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by TimeTheMarket »

The only thing that's worked for me is thoroughly ignoring information like this and keeping my head down--maybe even in the sand. This approach also backtests well looking back to the previous century. I thought 5000 sp500 close was nuts, but here we are less than a year later and > 20% higher.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by secondopinion »

rockstar wrote: Wed Jan 29, 2025 11:15 am
folkher0 wrote: Wed Jan 29, 2025 11:01 am

I agree with Silverado. So many think the lesson learned from the dotcom era was to avoid investing into an overvalued market. Unless you are an exquisite market time, I think that is the wrong lesson. As long as you are taking on appropriate risk, and your investment horizon in equities is long, the lesson I learned is to continue to buy at regular intervals, and not to time the market based on P/E or other metrics.

Even if you could know you are in a bubble, you can't know for sure when it will pop, and what else will pop with it.
The other bit forgotten was that bond yields back then were also much higher. And then we got a weakening dollar as well. The 10 year bond had over a 6% nominal yield. Of course, you would have done good in bonds back then. Bond yields also dropped from those high yields too. By the end of 2009, they were at about 3%. That’s a nice gain on top of the yield.
Right. I do not anticipate a larger pop than dot com; it might be a junior version. On the other hand, I do not trust 100% stocks (certainly not all in one country).
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Lawrence of Suburbia »

It does all give me a "deer in the headlights" feeling, this. Which gives me justification for having ~2 years' expenses (net of S.S. and annuity) in a money market fund.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by StartedAt22 »

I just keep buying international. US stocks keep rising quickly (relative to ex-US), so I keep using my contributions to buy more international funds

Maybe I'll never "buy" US stocks again with my contributions.

Maybe I'll win the powerball...
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by grok87 »

TimeTheMarket wrote: Wed Jan 29, 2025 11:44 am The only thing that's worked for me is thoroughly ignoring information like this and keeping my head down--maybe even in the sand. This approach also backtests well looking back to the previous century. I thought 5000 sp500 close was nuts, but here we are less than a year later and > 20% higher.
amen. stay the course!
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by folkher0 »

rockstar wrote: Wed Jan 29, 2025 11:37 am
folkher0 wrote: Wed Jan 29, 2025 11:24 am

Like i said, as long as you are taking on appropriate risk and your investment horizon is long. The "appropriate risk" component of that sentence implies not being 100% equities unless your risk tolerance is exceptionally high. So you own stocks and bonds or something else.
Just as long as your low risk portion of your portfolio is actually low risk.
yup
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by steve r »

Lowest since 2002 when it was the highest it had been since 1982. Not sure what to make of it all.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Elysium »

These threads will always get standard response because we are collectively trained to tune out all noise, sometimes it can make us blindsided to what's obvious, such as the bonds debacle in 2022. We had a few threads, and some dissenting sounds and some article citing bonds aren't attractive but then we always fall back to shrugging our shoulders to no one knows nothing. I don't know if this time is different or not, but I do know we have had one of the best 6 year runs for S&P 500 since I started investing in late 90's. So much that the 2022 drop is a blip when you look at 2019-2024. S&P has averaged 17% annual over this time even with a -18% dip in '22.

That surely is no indicator of what future holds, although what I know is I have had it good, and when you feel like you've had it good it's time to reassess. My equity allocation is also at the lowest point it has ever been, and my cash position has been the most it ever been. In my retirement portfolio I am at 65% equities now and my cash allocation alone is 1/3rd of my 35% fixed income. Mostly came from selling individual tech stocks I purchased in 2022 drop. My wife's portfolio is still heavily invested in equities since she is younger and may work a few years longer. Overall we are still close to 70/30 which is down from the 80/20 we have kept for many years during accumulation.

What is actionable here? we can all reassess and see if we have enough since the market's been good to us. If not, there is always "plan B" - look it up if you don't know.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by rockstar »

secondopinion wrote: Wed Jan 29, 2025 11:47 am
rockstar wrote: Wed Jan 29, 2025 11:15 am

The other bit forgotten was that bond yields back then were also much higher. And then we got a weakening dollar as well. The 10 year bond had over a 6% nominal yield. Of course, you would have done good in bonds back then. Bond yields also dropped from those high yields too. By the end of 2009, they were at about 3%. That’s a nice gain on top of the yield.
Right. I do not anticipate a larger pop than dot com; it might be a junior version. On the other hand, I do not trust 100% stocks (certainly not all in one country).
I don't trust nominal bonds right now to.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by asset_chaos »

Large US growth stocks do seem priced such that it's likely their performance next 10 years could be poorer than past 10 and perhaps also poorer than other asset classes. However, likely to is a long way from certain to. Therefore, I'll continue to stay the course with my favorite stock fund, total world, and enough safe assets to maintain equanimity and the lifestyle I like.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by BitTooAggressive »

ClassII wrote: Tue Jan 28, 2025 3:09 pm My common beef against articles like that is when you compare the stock market today from some time in the past you're assuming everything being equal. No, this isn't a "this time it's different" argument, necessarily. But consider that the world is very, very different than it was in 2000. Not just from a tech standpoint but business and the market itself. Far fewer companies offer dividends and way more people have 401k's. So shouldn't it stand to reason the stock market might work a bit differently?

Take it a bit more extreme compare today to, say, 1955. The stock market ran completely differently back then, so why should we measure ourselves against that? You wouldn't say a modern car is wildly unsafe driving at 60mph because a Model T would fly apart at that speed.

"This time is different" usually applies to short term trends like "AI will make the Dow reach 150k in 2 years!" but shouldn't be used to waive away long term macro trends. Perhaps US stocks are just going to run more expensive than they did in the past due to X, Y, and Z?

Point ultimately is, I have no freakin' clue. I try not to let articles like this sway me because simply applying the rules of thumb to the past to the realities of today's market is a fool's errand. The one rule that seems to stand up to time is just sticking to a long-term investing plan and let economic progress carry the day with a broad index fund.
More people have 401Ks but less have pensions.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by BitTooAggressive »

Elysium wrote: Wed Jan 29, 2025 6:42 pm These threads will always get standard response because we are collectively trained to tune out all noise, sometimes it can make us blindsided to what's obvious, such as the bonds debacle in 2022. We had a few threads, and some dissenting sounds and some article citing bonds aren't attractive but then we always fall back to shrugging our shoulders to no one knows nothing. I don't know if this time is different or not, but I do know we have had one of the best 6 year runs for S&P 500 since I started investing in late 90's. So much that the 2022 drop is a blip when you look at 2019-2024. S&P has averaged 17% annual over this time even with a -18% dip in '22.

That surely is no indicator of what future holds, although what I know is I have had it good, and when you feel like you've had it good it's time to reassess. My equity allocation is also at the lowest point it has ever been, and my cash position has been the most it ever been. In my retirement portfolio I am at 65% equities now and my cash allocation alone is 1/3rd of my 35% fixed income. Mostly came from selling individual tech stocks I purchased in 2022 drop. My wife's portfolio is still heavily invested in equities since she is younger and may work a few years longer. Overall we are still close to 70/30 which is down from the 80/20 we have kept for many years during accumulation.

What is actionable here? we can all reassess and see if we have enough since the market's been good to us. If not, there is always "plan B" - look it up if you don't know.
US value stocks are priced a bit better also international too. Diversification of your equities is actionable however there are many on this board that will be SP500 and BND no matter what and will consider nothing else.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by BitTooAggressive »

Silverado wrote: Tue Jan 28, 2025 6:01 pm They are so expensive I am going to buy more in the coming week. Same as I did in the dotcom era. I’ll buy them at any and all prices. I need some US stocks to buy food in 2050, might as well get to buying them so I will be ready. If I needed to sell anything today to buy food, those shares from 2000 are in good shape for doing that.
Do you buy apples at any price? What if oranges, grapes, strawberries, bananas are all $3 a pound and apples are $1000 a pound.

Nobody knows nothing, I am still buying apples.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Elysium »

BitTooAggressive wrote: Thu Jan 30, 2025 4:32 am
Elysium wrote: Wed Jan 29, 2025 6:42 pm These threads will always get standard response because we are collectively trained to tune out all noise, sometimes it can make us blindsided to what's obvious, such as the bonds debacle in 2022. We had a few threads, and some dissenting sounds and some article citing bonds aren't attractive but then we always fall back to shrugging our shoulders to no one knows nothing. I don't know if this time is different or not, but I do know we have had one of the best 6 year runs for S&P 500 since I started investing in late 90's. So much that the 2022 drop is a blip when you look at 2019-2024. S&P has averaged 17% annual over this time even with a -18% dip in '22.

That surely is no indicator of what future holds, although what I know is I have had it good, and when you feel like you've had it good it's time to reassess. My equity allocation is also at the lowest point it has ever been, and my cash position has been the most it ever been. In my retirement portfolio I am at 65% equities now and my cash allocation alone is 1/3rd of my 35% fixed income. Mostly came from selling individual tech stocks I purchased in 2022 drop. My wife's portfolio is still heavily invested in equities since she is younger and may work a few years longer. Overall we are still close to 70/30 which is down from the 80/20 we have kept for many years during accumulation.

What is actionable here? we can all reassess and see if we have enough since the market's been good to us. If not, there is always "plan B" - look it up if you don't know.
US value stocks are priced a bit better also international too. Diversification of your equities is actionable however there are many on this board that will be SP500 and BND no matter what and will consider nothing else.
Unfortunately the issue with trying to diversify US large cap equity risk with other types of equities such as International, Value, Small, REITs, etc is that they do not work in the immediate term when a major drawn down does occur. With the exception of 2000-02 crash which mainly affected dot com and tech sector, those other equities also follow US large, sometimes even more. Even in 2000-02, after couple of years of holding up, value and small fell in '02. They may hold up better over a longer time frame, if valuations are better or macro conditions favor them, although correlations tend to narrow in short term when there is a crisis.

The only true diversification away from equities can be fixed income, and with bonds now becoming again attractive yields they are an option, along with cash which is still offering good rates. I do hold some Intl and lately in my wife's account have a modest value tilt (funds like dodge & cox and fidelity low price value because she does not have index options available except broad market ones) going on since she has more time, although I am still reducing equity overall. That's just because when I look back the gains have been fantastic and maybe it's enough for now.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by BitTooAggressive »

Elysium wrote: Thu Jan 30, 2025 9:37 am
BitTooAggressive wrote: Thu Jan 30, 2025 4:32 am

US value stocks are priced a bit better also international too. Diversification of your equities is actionable however there are many on this board that will be SP500 and BND no matter what and will consider nothing else.
Unfortunately the issue with trying to diversify US large cap equity risk with other types of equities such as International, Value, Small, REITs, etc is that they do not work in the immediate term when a major drawn down does occur. With the exception of 2000-02 crash which mainly affected dot com and tech sector, those other equities also follow US large, sometimes even more. Even in 2000-02, after couple of years of holding up, value and small fell in '02. They may hold up better over a longer time frame, if valuations are better or macro conditions favor them, although correlations tend to narrow in short term when there is a crisis.

The only true diversification away from equities can be fixed income, and with bonds now becoming again attractive yields they are an option, along with cash which is still offering good rates. I do hold some Intl and lately in my wife's account have a modest value tilt (funds like dodge & cox and fidelity low price value because she does not have index options available except broad market ones) going on since she has more time, although I am still reducing equity overall. That's just because when I look back the gains have been fantastic and maybe it's enough for now.
I agree. Equity diversification helps greatly over time when different equity classes have different returns such as the lost decade.

For shorter downturns every equity class tends to drop. In this case I have short term high quality bonds.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Nathan Drake »

Elysium wrote: Thu Jan 30, 2025 9:37 am
BitTooAggressive wrote: Thu Jan 30, 2025 4:32 am

US value stocks are priced a bit better also international too. Diversification of your equities is actionable however there are many on this board that will be SP500 and BND no matter what and will consider nothing else.
Unfortunately the issue with trying to diversify US large cap equity risk with other types of equities such as International, Value, Small, REITs, etc is that they do not work in the immediate term when a major drawn down does occur. With the exception of 2000-02 crash which mainly affected dot com and tech sector, those other equities also follow US large, sometimes even more. Even in 2000-02, after couple of years of holding up, value and small fell in '02. They may hold up better over a longer time frame, if valuations are better or macro conditions favor them, although correlations tend to narrow in short term when there is a crisis.

The only true diversification away from equities can be fixed income, and with bonds now becoming again attractive yields they are an option, along with cash which is still offering good rates. I do hold some Intl and lately in my wife's account have a modest value tilt (funds like dodge & cox and fidelity low price value because she does not have index options available except broad market ones) going on since she has more time, although I am still reducing equity overall. That's just because when I look back the gains have been fantastic and maybe it's enough for now.
Diversification of equities is measured over multiple years, not days, weeks, or single years.

Bond “diversification” is more correlated over long terms to their domestic stock market, so not nearly as valuable at longer horizons compared to equity diversification

Long horizons matter a lot more for investors, so the short term bond considerations are more psychological/behavioral
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by HomerJ »

steve r wrote: Wed Jan 29, 2025 5:01 pm Lowest since 2002 when it was the highest it had been since 1982. Not sure what to make of it all.
Image
Wow.. that chart really tells the rest of the story.

So investing in stocks is bad today because the equity premium is about as low as it was in 2000.


But equity premium was even LOWER during the 1980s and 1990s and those were GREAT years to invest.

It's all noise. There are no real experts.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Nathan Drake »

HomerJ wrote: Thu Jan 30, 2025 4:27 pm
steve r wrote: Wed Jan 29, 2025 5:01 pm Lowest since 2002 when it was the highest it had been since 1982. Not sure what to make of it all.
Image
Wow.. that chart really tells the rest of the story.

So investing in stocks is bad today because the equity premium is about as low as it was in 2000.


But equity premium was even LOWER during the 1980s and 1990s and those were GREAT years to invest.

It's all noise. There are no real experts.
They were better years to invest in bonds than stocks, still.

Yields were insanely high
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by steve r »

Looking at PE ratios on M* for VTI (21.3) and VXUS (13.1). (not CAPE)

That is quite a difference. I am wondering how that delta compares over time? Thanks.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by watchnerd »

steve r wrote: Thu Jan 30, 2025 5:06 pm Looking at PE ratios on M* for VTI (21.3) and VXUS (13.1). (not CAPE)

That is quite a difference. I am wondering how that delta compares over time? Thanks.
Crude basic stock earnings yield vs bond comparison:

VTI: 100/21.3 = 4.69%
VXUS: 100 / 13.1 = 7.63%
10 YR Treasury (nominal): 4.57%
10 YR TIPS (real): 2.14%
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by Nathan Drake »

Isn’t the graph in the OP an incorrect ERP?

Shouldn’t it be Earnings Yield minus 10Y Real Yield (not nominal)? That would place the ERP as positive
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by secondopinion »

Nathan Drake wrote: Thu Jan 30, 2025 7:12 pm Isn’t the graph in the OP an incorrect ERP?

Shouldn’t it be Earnings Yield minus 10Y Real Yield (not nominal)? That would place the ERP as positive
It should be against real yield as far as I know.
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Re: US stocks at most expensive relative to bonds since dotcom era

Post by secondopinion »

HomerJ wrote: Thu Jan 30, 2025 4:27 pm
steve r wrote: Wed Jan 29, 2025 5:01 pm Lowest since 2002 when it was the highest it had been since 1982. Not sure what to make of it all.
Image
Wow.. that chart really tells the rest of the story.

So investing in stocks is bad today because the equity premium is about as low as it was in 2000.


But equity premium was even LOWER during the 1980s and 1990s and those were GREAT years to invest.

It's all noise. There are no real experts.
This is not in expected real yields, so the chart is a bit inaccurate to use. But how do we measure that back when TIPS were not invented?
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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