Shares Are Wildly Overpriced. But Bonds May Be Even Worse

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Always passive
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Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Always passive » Fri Jan 12, 2018 12:56 am

From yesterday’s WSJ..
The essence of the article in quotations.


Shares Are Wildly Overpriced. But Bonds May Be Even Worse
On bonds...
“Bonds mat­ter to share­hold-ers in many ways, with the most ob­vi­ous be­ing that they are the main al­ter­na­tive in­vest­ment, along with cash. Shares are very ex­pen­sive com­pared with their own his­tory on al­most every mea­sure, but com­pared with lock­ing in a pal­try 2.5% for 10 years they don’t look so bad. To put some num­bers on it, an­a­lyst es­ti­mates of for­ward-look­ing op­er­at­ing earn­ings are 5.4% of the price of the S&P 500, and fore­cast to keep ris­ing in fu­ture years. Why set­tle for 2.5% from bonds when the earn­ings yield on stocks is dou­ble that?”
“The ques­tion comes down to one of re­ward for risk. Earn­ings are un­cer­tain, so share­hold­ers should get an ex­tra re­ward for the risk of hold­ing stocks com­pared with the cer­tainty of­fered by Trea­surys. That re­ward, known as the eq­uity risk pre­mium, shrinks if bond yields rise faster than the out­look for profit.”

On stocks...
“Since 1900, U.S. stocks with div­i­dends rein­vested have re­turned 6% a year af­ter in­fla-tion, ac­cord­ing to Credit Su­isse. In­vestors should be able to dampen down their ex­pec­ta-tions, and plan for some­thing closer to 2% af­ter in­fla­tion over the next decade as val­u­a­tions drop back to more rea­son­able lev­els. That is still far bet­ter than bonds, just ter­ri­bly dis­ap­point­ing for those who hope to re­peat the 13% an­nu­al-ized real re­turn of the past nine years’ bull run.”

I do happen to agree that there are very few places, if any, to look for value. We may stay the course, as is preached here, but the road ahead maybe disappointing. What does the forum think?

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by AlohaJoe » Fri Jan 12, 2018 1:17 am

Always passive wrote:
Fri Jan 12, 2018 12:56 am
What does the forum think?
I think the article was written by the same James Mackintosh who wrote in November 10, 2010, "Equity returns will be poor for the next decade".

CAGR since then has been 14.28%. The decade isn't quite up yet, by we're over 70% done with it.

I think he's a journalist that has a weekly column to fill.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by WanderingDoc » Fri Jan 12, 2018 1:21 am

After all the "bonds are bad" and "100% equities" threads on here in just the last 2 weeks, I've decided to go "all-in", 100% equities. YOLO
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by FIREchief » Fri Jan 12, 2018 1:49 am

Nobody knows nothin.....

I've been reading for the past year how real returns in stocks will be 3% to 4% per year for the next several decades. Guess what? We're up over 3% in 8 trading days of 2018. Yeah, glad I listened to the experts! :D
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by willthrill81 » Fri Jan 12, 2018 11:41 am

It's impossible to say what future returns will be. The next ten years could easily see stocks return 3%. A few years of consecutive losses like 2000-2002 can really bring down overall returns for a ten year period. That being said, I'm almost 100% stocks.
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by aristotelian » Fri Jan 12, 2018 11:47 am

I go back and forth between 100/0 and 0/100 on a daily basis based on the first article I read with my morning coffee.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by bgf » Fri Jan 12, 2018 11:51 am

AlohaJoe wrote:
Fri Jan 12, 2018 1:17 am
Always passive wrote:
Fri Jan 12, 2018 12:56 am
What does the forum think?
I think the article was written by the same James Mackintosh who wrote in November 10, 2010, "Equity returns will be poor for the next decade".

CAGR since then has been 14.28%. The decade isn't quite up yet, by we're over 70% done with it.

I think he's a journalist that has a weekly column to fill.
agreed. and furthermore, i have little if any respect now for any journalism that is driven by 'clicks.' they have incredible real time data analysis now that shows them the content of articles, headlines, etc. that drive the most clicks.

i think it is pretty clear what kind of headlines and information drive the most clicks in the financial markets/investing space... it is why we see the same exact stuff repeated ad infinitum...

you should discount just about everything that you read in daily columns, especially on the internet, even from the WSJ.

long form print journalism is probably as far as i'll go with respect to 'worth my time' to read, if that.
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by bigred77 » Fri Jan 12, 2018 12:07 pm

It's almost like the behavior we'd expect to see if interest rates on treasuries were used to discount the future expected cash flows of companies in order to derive stock prices. :mrgreen: (end sarcasm)

i.e. when interest rates are low, we should fully expect to see a higher range of valuations. None of this all that controversial.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by CppCoder » Fri Jan 12, 2018 12:17 pm

WanderingDoc wrote:
Fri Jan 12, 2018 1:21 am
After all the "bonds are bad" and "100% equities" threads on here in just the last 2 weeks, I've decided to go "all-in", 100% equities. YOLO
Usually that's the sign to go 100% bonds as it means the fervor of the bull market has reached the masses...

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Alexa9 » Fri Jan 12, 2018 12:20 pm

I'm going 100% CD's until the stock and bond market crashes. My crystal ball tells me it will happen relatively soon. :mrgreen:

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by nisiprius » Fri Jan 12, 2018 12:27 pm

Can't get at paywalled WSJ articles any more, but as always: how much "even worse" in dollars? And how certain is "may be" in terms of taking action?

Shares of Vanguard Total Bond were $10 a share when the fund launched in 1986. Today they are at 10.69%. Here is a PRICE chart, which ignores the (considerable!) payouts from fund dividends over the years. The dotted lines are just lines I chose to draw in by eye.

Source

Image

Eh, I dunno. Let's just take the starting point and the endpoint. So maybe the bonds in my fund are overpriced by 7%. No evidence it's getting worse, in fact over the six years the trend looks to me like level or slightly down.

+7%. Should I care?

If I'm looking for some clever play to make, involving leverage, long-short, options, risk parity... who knows what... then, who know, "bonds are 7% overpriced" might be "worse" than "stocks are 30% overpriced."

If I'm just wondering about whether I need to run before a bond crash ruins my retirement... naaaah.
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by jazman12 » Fri Jan 12, 2018 12:29 pm

50/50 Can't lose! :happy
Act soon... time is running out

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by bloom2708 » Fri Jan 12, 2018 12:32 pm

Fall back to "nobody knows nothin".

If the DOW hits 1,000,000 (Warren Buffet) then these prices will be wildly low. :wink:
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by t885 » Fri Jan 12, 2018 12:38 pm

aristotelian wrote:
Fri Jan 12, 2018 11:47 am
I go back and forth between 100/0 and 0/100 on a daily basis based on the first article I read with my morning coffee.
LOL
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Toons » Fri Jan 12, 2018 12:43 pm

60/40
50/50
Forget About It
:happy
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by facepalm » Fri Jan 12, 2018 8:18 pm

aristotelian wrote:
Fri Jan 12, 2018 11:47 am
I go back and forth between 100/0 and 0/100 on a daily basis based on the first article I read with my morning coffee.
lately, I have been asking my shoeshine boy for stock tips. He suggests Bitcoin.

Someone suggested that stocks are overvalued? Even if they are, at some point in the future current prices will not be. So I'll just hold on to what I have.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by nedsaid » Fri Jan 12, 2018 9:17 pm

The thing is, even though bonds might be overpriced they are still far less volatile than stocks. For me the concern isn't that bonds will drop 50% but that they won't keep up with inflation.
A fool and his money are good for business.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Dottie57 » Fri Jan 12, 2018 9:23 pm

Toons wrote:
Fri Jan 12, 2018 12:43 pm
60/40
50/50
Forget About It
:happy
+1

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patrick013
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by patrick013 » Fri Jan 12, 2018 10:04 pm

From yesterday’s WSJ..
The essence of the article in quotations.
Well bull or bear that's the morning paper, shock journalism
either way. Rising rates are bad for bonds and high prices
are bad for stocks.

Reading one analyst - he sees the FFR at 3 but then retreating to
2 in the next few years. He sees the dollar index over 100 which
should be good for Intl.. But then he expects the DOW to decline
to 20,000. The DOW isn't really super overvalued so his logic is
mostly economic I'd say. Just have to wait and see.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by lawman3966 » Fri Jan 12, 2018 10:11 pm

I am trying to figure out just how overpriced the stock market supposedly is. A list of Key Metrics from Factset, date today Jan. 12, 2018, states that the estimated forward P/E ratio for the S&P 500 is 18.4, a whole 15.7% above the five-year moving average of 15.9, and 29% above the ten-year moving average of 14.2. If the suggestion here is that stock market shock could cause the P/E ratio to revert to 14.2, thus leading to a 23% decline in the market, I find the danger underwhelming.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by nisiprius » Fri Jan 12, 2018 10:11 pm

nedsaid wrote:
Fri Jan 12, 2018 9:17 pm
The thing is, even though bonds might be overpriced they are still far less volatile than stocks. For me the concern isn't that bonds will drop 50% but that they won't keep up with inflation.
Well said.
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by David Jay » Fri Jan 12, 2018 10:27 pm

facepalm wrote:
Fri Jan 12, 2018 8:18 pm
lately, I have been asking my shoeshine boy for stock tips. He suggests Bitcoin.
I'm down with that. At least Bitcoin isn't "Wildly Overpriced"...
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by BogleMelon » Fri Jan 12, 2018 10:50 pm

The risk of bonds is the interest rate. Higher interest rate would make bonds' NAV price to go down. However, holding them to maturity will yield the promised dividends. In other words, unlike stocks, even with interest risk and even with the high valuation, they should give what they promised to give. Not talking about junk bonds of course which are NOT included in Vanguard total bond fund anyways.
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by willthrill81 » Fri Jan 12, 2018 11:42 pm

lawman3966 wrote:
Fri Jan 12, 2018 10:11 pm
I am trying to figure out just how overpriced the stock market supposedly is. A list of Key Metrics from Factset, date today Jan. 12, 2018, states that the estimated forward P/E ratio for the S&P 500 is 18.4, a whole 15.7% above the five-year moving average of 15.9, and 29% above the ten-year moving average of 14.2. If the suggestion here is that stock market shock could cause the P/E ratio to revert to 14.2, thus leading to a 23% decline in the market, I find the danger underwhelming.
+1

Even though I do believe that valuations can be useful metrics, when people use them to say things like "stocks are overvalued," what they really mean is "stocks are more highly valued today than at X time period." Does that mean that the valuations will revert to a prior value? U.S. equity valuations over the last 26 years and counting seem to suggest that the answer very well might be no.

I think the bigger question is, if valuations remain high compared to the past, will we continue to see long-term equity returns approximately equal their long-term average? Again, the last 26 years of U.S. stock returns (TSM 1992-2017: 9.60% nominal, 7.18% real) suggest that we might.
“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: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by willthrill81 » Fri Jan 12, 2018 11:44 pm

BogleMelon wrote:
Fri Jan 12, 2018 10:50 pm
The risk of bonds is the interest rate.
In the short-term, (mostly) yes.

In the long-term, no. Inflation is the real enemy of nominal 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

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by AtlasShrugged? » Sat Jan 13, 2018 10:07 am

I am trying to figure out just how overpriced the stock market supposedly is. A list of Key Metrics from Factset, date today Jan. 12, 2018, states that the estimated forward P/E ratio for the S&P 500 is 18.4, a whole 15.7% above the five-year moving average of 15.9, and 29% above the ten-year moving average of 14.2. If the suggestion here is that stock market shock could cause the P/E ratio to revert to 14.2, thus leading to a 23% decline in the market, I find the danger underwhelming.
lawman3966....I am with you on this one. We have has so many financial regulatory changes just in the last decade that affect how companies have to do their accounting and reporting, one wonders if the market is truly overvalued, or just fairly valued (which is my view). I am not so certain that CAPE 10 has the same relevance as it has had in the past. The predictive power of CAPE 10 is not all that great. Combine the lack of predictive power and all the reg changes....we're talking about a very different way to evaluate market valuation (IMHO).

Personally, I reject the proposition that stocks and bonds are wildly overpriced. While the bull market has been going on for some time, I seem to recall a correction or two along the way (the taper tantrum, Q3 2015, Q1 2016), where we saw market declines. With the passage of tax reform, I can foresee equities going higher - much higher. Those corporate profits are going to go somewhere, no? My supposition is a goodly amount will go to shareholders, which can only help. As for bonds, what are we really talking about here. I just don't see bond fund NAVs going down all that much.
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by UpperNwGuy » Sat Jan 13, 2018 11:22 am

Dottie57 wrote:
Fri Jan 12, 2018 9:23 pm
Toons wrote:
Fri Jan 12, 2018 12:43 pm
60/40
50/50
Forget About It
:happy
+1
+2
Retiree with a pension and a 60/40 taxable portfolio: Total Stock + Total Int'l + Total Bond + Interm Term Tax Exempt.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by bertilak » Sat Jan 13, 2018 12:06 pm

aristotelian wrote:
Fri Jan 12, 2018 11:47 am
I go back and forth between 100/0 and 0/100 on a daily basis based on the first article I read with my morning coffee.
I've simplified that. I'm 100% stocks with half my money and 100% bonds with the other half. No need to jump back and forth. One half or the other's gotta be the winner and the other half probably won't be too far behind.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by JamalJones » Sat Jan 13, 2018 1:37 pm

aristotelian wrote:
Fri Jan 12, 2018 11:47 am
I go back and forth between 100/0 and 0/100 on a daily basis based on the first article I read with my morning coffee.

Haha! Nice! :P
TSP + Vanguard Roth IRA + Vanguard Taxable: 80% equities / 20% bonds | Yap, yap, yap, yap, - the bottom line is ya gotta buckle up the chin strap!

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Scooter57 » Sat Jan 13, 2018 4:32 pm

That graph of bond fund prices since the mid-1980s Nisiprius loves so much is irrelevant. Bond yields have steadily declined since that period with only little blips where they rose for a short period of time. CDs were paying 12% at the time that graph starts out. They were paying 10% years later. Investors were being compensated for the risk they were taking.

The other issue that doesn't show up on graphs is the rising rate of debt world-wide and the way in which central banks have used up all their ammunition. The US government just signed up for a trillion dollars more debt. At the same time when the Fed is looking at unwinding the huge amount of bonds it holds and where Fed authorities are honest in stating that given how unprecedented this whole experiment has been, it is uncertain what the effect will be of unwinding it. Beyond that, in 1986 when companies took on debt, it was to buy new plants, develop new products and hire new people to keep the company competitive. Now the majority of corporate debt has been used to finance stock buybacks which have created a new class of billionaires while doing nothing for the competitiveness or even the health of the companies borrowing that money. The execs who cashed in their stock options are long gone when that debt needs to be refinanced at higher rates.

Insane levels of borrowing at artificially low rates must eventually lead to refinancing of that debt at higher rates by companies who used that debt unwisely.

So we must always remember: Each financial crisis is different. Those of us who are at the point in life where we are not going to be earning more need to be very cautious whith how we deploy our money.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by JaneyLH » Sun Jan 14, 2018 10:57 pm

I’ve moved from 60/40 to 65/35. And yes, I realize that it will likely make no substantive difference.

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Stormbringer » Mon Jan 15, 2018 7:18 am

Anyone who says shares are "wildly overpriced" slept through finance class. Interest rates, which remain exceptionally low, have a significant impact on how you value a stream of cash flows:

Image

On top of the low interest rates, we have strong earnings growth (C1 ... Ct above) from the economic expansion and now a large corporate tax cut.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Call_Me_Op » Mon Jan 15, 2018 8:11 am

Toons wrote:
Fri Jan 12, 2018 12:43 pm
60/40
50/50
Forget About It
:happy
Anyone for 40/60? :wink:
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by RRAAYY3 » Mon Jan 15, 2018 8:49 am

Weird, I was reading the same nonsense in March when I was hesitant to open my taxable account

It’s up over 15% since that histeria ...

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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by Toons » Mon Jan 15, 2018 10:55 am

Call_Me_Op wrote:
Mon Jan 15, 2018 8:11 am
Toons wrote:
Fri Jan 12, 2018 12:43 pm
60/40
50/50
Forget About It
:happy
Anyone for 40/60? :wink:
Sounds Great To Me
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Re: Shares Are Wildly Overpriced. But Bonds May Be Even Worse

Post by uberational44 » Thu Jan 18, 2018 4:21 pm

AlohaJoe wrote:
Fri Jan 12, 2018 1:17 am
Always passive wrote:
Fri Jan 12, 2018 12:56 am
What does the forum think?
I think the article was written by the same James Mackintosh who wrote in November 10, 2010, "Equity returns will be poor for the next decade".

CAGR since then has been 14.28%. The decade isn't quite up yet, by we're over 70% done with it.

I think he's a journalist that has a weekly column to fill.
The markets have enjoyed enormous returns over the past ten years, but they trading on bought time. The combination of surging corporate debt, dramatic increases in consumer debt and QE do not bode well for the future:

https://www.marketwatch.com/story/us-ho ... 2017-04-03

https://www.cnbc.com/2017/11/20/the-deb ... s-gdp.html

Wouldn't consider myself a financial expert, I just know I won't be going near bonds anytime soon! :D
Marketeer investing as a hobby. Interested in modern takes on value investing, passive investing and general contrarianism.

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