Stock Bubble? History Argues the Contrary

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whereskyle
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Re: Stock Bubble? History Argues the Contrary

Post by whereskyle »

Beensabu wrote: Fri Mar 26, 2021 8:08 pm
whereskyle wrote: Fri Mar 26, 2021 7:31 pm ...the late 70s and early 80s, unless ex-us stocks did well ... Let me know if ex-us stocks performed well during that period (if you know).
They "kicked butt", specifically Pacific, more specifically Japan. For two whole decades. The majority of which is not included in Portfolio Visualizer.
So then perhaps VT 50%, VGSH 25%, VGLT 25% makes a nice permanent portfolio sans gold.

I wrote PV to ask them to add global equities as an asset class. They told me "No, do it yourself." If only I could backtest global equities before 2008.
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Beensabu
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Re: Stock Bubble? History Argues the Contrary

Post by Beensabu »

whereskyle wrote: Fri Mar 26, 2021 8:42 pm
Beensabu wrote: Fri Mar 26, 2021 8:08 pm
whereskyle wrote: Fri Mar 26, 2021 7:31 pm ...the late 70s and early 80s, unless ex-us stocks did well ... Let me know if ex-us stocks performed well during that period (if you know).
They "kicked butt", specifically Pacific, more specifically Japan. For two whole decades. The majority of which is not included in Portfolio Visualizer.
So then perhaps VT 50%, VGSH 25%, VGLT 25% makes a nice permanent portfolio sans gold.

I wrote PV to ask them to add global equities as an asset class. They told me "No, do it yourself." If only I could backtest global equities before 2008.
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watchnerd
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

whereskyle wrote: Fri Mar 26, 2021 7:31 pm
watchnerd wrote: Thu Mar 25, 2021 6:27 pm
OohLaLa wrote: Thu Mar 25, 2021 5:47 pm I truly find it hard to believe that watchnerd, closing in on 7k posts after many years, does not understand that there are interactions between different assets of a portfolio. What I was saying is that if he does not trust the behavior of gold to be consistent, or guaranteed to be consistent by its very nature, then whether it's alone or within a portfolio does not matter. People see it as a proper hedge... he stated he does not, for XYZ reasons.
I've actually owned gold in the past, as well as commodity futures, so I'm well aware, both on a personal experience level and from data, on the trade offs in a portfolio.

Roles gold can play in portfolio construction and my current alternative preferences, all of which are visible in my sig:

--Negative correlation with equities / flight to safety: LTT (bonus, also helps in deflation)

--Inflation protection: TIPS

--Dollar decline relative to other currencies: ~50% of my stocks (30% of my port, market weight fluctuates) are unhedged foreign equities

Roles gold plays that I don't solve for:

--Total financial apocalypse / Mad Max scenarios / fleeing the country / refugee status
Chiming in late on this after backtesting the permanent portfolio. The one historical period that all of your preferred assets (all of which I think are reasonable to hold) would have struggled in by comparison is the late 70s and early 80s, unless ex-us stocks did well. I don't have data on that. TIPS might have netted a 0% real return, but gold didn't merely keep up with inflation, it kicked its butt, earning 12% real from the beginning of 77 until the end of 81. Not that I expect that period to reoccur. I just wanted to disregard the gold portion myself and fashion a modified permanent portfolio excluding it. But I failed. Let me know if ex-us stocks performed well during that period (if you know).

A lot of people really, really, really believe in gold. Perhaps that has to count for something in our irrationally exuberant world.

That's a weird period of history, as it's the period right after the US came off the gold standard, which obviously was a 1 time event.

You can try to throw generic commodities into the mix, but it doesn't help as much as gold. I held commodities futures indexes circa 2001-2008, along with MLPs, but you have to be willing to get out of them quickly when the economic regime changes; commodities are not buy and hold forever, as recent performance since has shown. I'm reluctant to hold commodities again as, in the long run, they're zero real return.

I admit, 70's style stagflation is a case that my current port doesn't deal with very well.

Then again, I don't think the standard BH/Vanguard ports would, either.

And TIPS didn't exist back then......so when you test the 1970s, there is no data on how TIPS would have done.

The only asset class I can think of that I might be willing to add to my port to deal with stagflation might be EM bonds -- but I'm not so sure that would work as well as it might have in the past, either, given general changes in the economy that have reduced commodity consumption relative to GDP since the 1970s.
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watchnerd
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

whereskyle wrote: Fri Mar 26, 2021 8:42 pm
I wrote PV to ask them to add global equities as an asset class. They told me "No, do it yourself." If only I could backtest global equities before 2008.
I just SWAG it by going 50/50 with the US vs ex-US classes they have.
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

whereskyle wrote: Fri Mar 26, 2021 8:42 pm

So then perhaps VT 50%, VGSH 25%, VGLT 25% makes a nice permanent portfolio sans gold.
You're getting closer to my sig.

I use a 1/4 ratio for LTT to equities as the trade-off between volatility reduction and returns that I'm comfortable with.

But if you're just trying to hit 25% segments for aesthetics, sure.

However, the Permanent Port is flawed in its weighting, as it doesn't reflect risk parity balancing nor the frequency at which the regimes it's trying to combat occur.
Last edited by watchnerd on Fri Mar 26, 2021 11:51 pm, edited 3 times in total.
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watchnerd
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

Random Musings wrote: Fri Mar 26, 2021 8:09 pm IMHO, the quest for quick riches, BTC, NFT's, Robinhood, 3x portfolio's, huge swings with certain stocks like GME having no real story says that we are closer to the end. But unlike 2008, when all asset classes were hammered, I believe that value and international won't take it on the chin as badly as the growth darlings. However, unlike 2008, I don't believe bonds can save the day as much, or maybe not at all.

Starting in the fall, I have been repositioning more into value and int'l on the equity side and lower duration's on the bond side (like ST TIPs); haven't really changed equity/bond allocation, But that time may come.

RM
I pretty much agree.

I'm already global market weight, so kinda-sorta-50%-ish international anyway, which are less pricey in valuations.

I recently added Frontier Markets to my port (FM ETF). The PE and yields are like something from another era.

Short TIPS are also already part of my port (see sig).

And, I agree, my LTT won't be able to save the day like in the past due being at the end of their long secular cycle. I'll probably have to wait another 10-20 years for that trick to work again as well as it has in the last 12 years.

10% cash may matter more and make up some of the difference.
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Beensabu
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Re: Stock Bubble? History Argues the Contrary

Post by Beensabu »

watchnerd wrote: Fri Mar 26, 2021 10:47 pm And, I agree, my LTT won't be able to save the day like in the past
You might end up being surprised.
... due being at the end of their long secular cycle. I'll probably have to wait another 10-20 years for that trick to work again as well as it has in the last 12 years.
You might want to revisit that line of thought. Check it out: https://www.bankofengland.co.uk/-/media ... -1311-2018
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

Beensabu wrote: Sat Mar 27, 2021 12:00 am
watchnerd wrote: Fri Mar 26, 2021 10:47 pm And, I agree, my LTT won't be able to save the day like in the past
You might end up being surprised.
... due being at the end of their long secular cycle. I'll probably have to wait another 10-20 years for that trick to work again as well as it has in the last 12 years.
You might want to revisit that line of thought. Check it out: https://www.bankofengland.co.uk/-/media ... -1311-2018
Yes, I've read that before.

And if it turns out that we go to zero / negative, then LTT will do better than I expect.
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Beensabu
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Re: Stock Bubble? History Argues the Contrary

Post by Beensabu »

watchnerd wrote: Sat Mar 27, 2021 12:14 am
Beensabu wrote: Sat Mar 27, 2021 12:00 am
watchnerd wrote: Fri Mar 26, 2021 10:47 pm And, I agree, my LTT won't be able to save the day like in the past
You might end up being surprised.
... due being at the end of their long secular cycle. I'll probably have to wait another 10-20 years for that trick to work again as well as it has in the last 12 years.
You might want to revisit that line of thought. Check it out: https://www.bankofengland.co.uk/-/media ... -1311-2018
Yes, I've read that before.

And if it turns out that we go to zero / negative, then LTT will do better than I expect.
Not just that, but if there is indeed a suprasecular decline (and it sure looks like there is according to that anyway), then the recent secular cycle was actually an aberration in the very long-term trend and isn't something that anyone should count on repeating in the future (either at all or in any particular amount of time).
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Re: Stock Bubble? History Argues the Contrary

Post by GoneOnTilt »

sapphire96 wrote: Sun Mar 21, 2021 11:57 am
HootingSloth wrote: Sun Mar 21, 2021 10:49 am It would be great to see these same charts with the trend fixed by, say, a 1937 start date and 2009 end date as a robustness check that addresses JoMoney's point. How much does your qualitative assessment depend on the period chosen?
So for giggles, I just created an all-time exponential average. It would imply a few things...
1873-1897 had elevated prices with no growth.
The 1925-1929 "bubble" was never a bubble.
The US never got back to average until the 1960s, but barely.
Prices have been elevated since 1990 - the tech bubble never fully popped.
The bottom of the Great Financial Crisis crash had evaluations back to average.

The question I think arises was there a fundamental economic shift in the US starting in the 1930s that created a new exponential average growth line and does this create the possibility of a lower (or higher?) exponential growth line for the future.
Image
Any chance of showing the same time period for ex-US stocks? :-)
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watchnerd
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

Beensabu wrote: Sat Mar 27, 2021 1:04 am Not just that, but if there is indeed a suprasecular decline (and it sure looks like there is according to that anyway), then the recent secular cycle was actually an aberration in the very long-term trend and isn't something that anyone should count on repeating in the future (either at all or in any particular amount of time).
I can rationalize the recent secular aberration as being instigated by unintended consequences of shifting off the gold standard.

That kind of monetary regime shift isn't something that happens all that frequently in history.

Debasement having been the more typical historical pattern.
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Beensabu
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Re: Stock Bubble? History Argues the Contrary

Post by Beensabu »

watchnerd wrote: Sat Mar 27, 2021 12:31 pm
Beensabu wrote: Sat Mar 27, 2021 1:04 am Not just that, but if there is indeed a suprasecular decline (and it sure looks like there is according to that anyway), then the recent secular cycle was actually an aberration in the very long-term trend and isn't something that anyone should count on repeating in the future (either at all or in any particular amount of time).
I can rationalize the recent secular aberration as being instigated by unintended consequences of shifting off the gold standard.

That kind of monetary regime shift isn't something that happens all that frequently in history.

Debasement having been the more typical historical pattern.
Agreed. The bolded bit explains a lot of things, including the performance of gold during that period that led to it being thought of as an inflation hedge when it very well may be nothing of the sort.
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Re: Stock Bubble? History Argues the Contrary

Post by Robot Monster »

Y'all ready for this! new Bloomberg article, "Bubble Deniers Abound to Dismiss Valuation Metrics One by One". link
-->Shiller P/E. Tobin’s Q. Buffett Indicator. Ignore them all?
-->It’s ‘usually an indication we’re trying to justify something’
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Re: Stock Bubble? History Argues the Contrary

Post by sperry8 »

JoMoney wrote: Sun Mar 21, 2021 10:42 am Why the 1933 start date? Seems odd to pick a year that's a known stock market low point as the start date for your growth line.
Doesn't seem to be have been a point that was "average" relative to growth starting in other years.
Pick the high point in 1928ish... line would still go way up and prove the same point
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

Robot Monster wrote: Sat Mar 27, 2021 7:09 pm Y'all ready for this! new Bloomberg article, "Bubble Deniers Abound to Dismiss Valuation Metrics One by One". link
-->Shiller P/E. Tobin’s Q. Buffett Indicator. Ignore them all?
-->It’s ‘usually an indication we’re trying to justify something’
And there is this juicy quote:
Valuations are never useful market-timing tools because expensive stocks can get more expensive, as was the case during the Internet bubble. Yet viewed through a long-term lens, valuations do matter. That is, the more over-valued the market is, the lower the future returns. According to a study by Bank of America strategists led by Savita Subramanian, things like price-earnings ratios could explain 80% of the S&P 500’s returns during the subsequent 10 years. The current valuation framework implies an increase of just 2% a year over the next decade, their model shows.
And now:

Cue rebuttals, nobody knows nothin', etc.
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Re: Stock Bubble? History Argues the Contrary

Post by ljford7 »

Go and do a quick google search for: overvalued stocks followed by a year. Every year in the recent past has lots of articles about overvalued stocks, yet the S&P has kept moving up and to the right.
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Re: Stock Bubble? History Argues the Contrary

Post by JoMoney »

sperry8 wrote: Sat Mar 27, 2021 7:11 pm
JoMoney wrote: Sun Mar 21, 2021 10:42 am Why the 1933 start date? Seems odd to pick a year that's a known stock market low point as the start date for your growth line.
Doesn't seem to be have been a point that was "average" relative to growth starting in other years.
Pick the high point in 1928ish... line would still go way up and prove the same point
OP is using a chart based on price-only index.
Dec 30, 1928 S&P 500 was 24.35
Mar 26, 2021 S&P 500 close was 3,974.54
Roughly a 5.7% CAGR

From 1933 S&P 500 was 6.83
To the same current end date that's a 7.5% CAGR

Yahoo! FInance S&P 500 price history

Compounded over 80+ years those are going to be massively different trend lines. Over 80 years that's the difference between
$1 growing to $85 and
$1 growing to $330
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Re: Stock Bubble? History Argues the Contrary

Post by txhill »

I believe there are lots of little bubbles here and there, but there are too many variables to know if a systemic or market wide crash is imminent or not. Importantly, we are in uncharted waters when it comes to monetary policy. I’d suggest that if you make any adjustments, do so sparingly, and for the most part just stay the course.
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Re: Stock Bubble? History Argues the Contrary

Post by sperry8 »

JoMoney wrote: Sun Mar 28, 2021 8:56 am
sperry8 wrote: Sat Mar 27, 2021 7:11 pm
JoMoney wrote: Sun Mar 21, 2021 10:42 am Why the 1933 start date? Seems odd to pick a year that's a known stock market low point as the start date for your growth line.
Doesn't seem to be have been a point that was "average" relative to growth starting in other years.
Pick the high point in 1928ish... line would still go way up and prove the same point
OP is using a chart based on price-only index.
Dec 30, 1928 S&P 500 was 24.35
Mar 26, 2021 S&P 500 close was 3,974.54
Roughly a 5.7% CAGR

From 1933 S&P 500 was 6.83
To the same current end date that's a 7.5% CAGR

Yahoo! FInance S&P 500 price history

Compounded over 80+ years those are going to be massively different trend lines. Over 80 years that's the difference between
$1 growing to $85 and
$1 growing to $330
Obviously you can finagle the starting point to show whatever point you're trying to show. The point is, over the long term, the line goes way up and to the right. Way up. Bubbles can't even be seen the further out you go. Don't understand all the focus on whether we're in a bubble or not. It's irrelevant. Buy & hold and only sell the portion you need, when you need to. If that's 20+ years away... bubbles mean nothing to you.
BH contests: 2020 #253 of 664 | 19 #233 of 645 | 18 #150 of 493 | 17 #516 of 647 | 16 #121 of 610 | 15 #18 of 552 | 14 #225 of 503 | 13 #383 of 433 | 12 #366 of 410 | 11 #113 of 369 | 10 #53 of 282
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

ljford7 wrote: Sun Mar 28, 2021 8:38 am Go and do a quick google search for: overvalued stocks followed by a year. Every year in the recent past has lots of articles about overvalued stocks, yet the S&P has kept moving up and to the right.
And, ergo, it's a perpetual motion machine that must intrinsically increase in valuation forever with no upper boundary?

C'mon....

Look at the Nikkei.
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Re: Stock Bubble? History Argues the Contrary

Post by JoMoney »

sperry8 wrote: Sun Mar 28, 2021 9:20 am
JoMoney wrote: Sun Mar 28, 2021 8:56 am
sperry8 wrote: Sat Mar 27, 2021 7:11 pm
JoMoney wrote: Sun Mar 21, 2021 10:42 am Why the 1933 start date? Seems odd to pick a year that's a known stock market low point as the start date for your growth line.
Doesn't seem to be have been a point that was "average" relative to growth starting in other years.
Pick the high point in 1928ish... line would still go way up and prove the same point
OP is using a chart based on price-only index.
Dec 30, 1928 S&P 500 was 24.35
Mar 26, 2021 S&P 500 close was 3,974.54
Roughly a 5.7% CAGR

From 1933 S&P 500 was 6.83
To the same current end date that's a 7.5% CAGR

Yahoo! FInance S&P 500 price history

Compounded over 80+ years those are going to be massively different trend lines. Over 80 years that's the difference between
$1 growing to $85 and
$1 growing to $330
Obviously you can finagle the starting point to show whatever point you're trying to show. The point is, over the long term, the line goes way up and to the right. Way up. Bubbles can't even be seen the further out you go. Don't understand all the focus on whether we're in a bubble or not. It's irrelevant. Buy & hold and only sell the portion you need, when you need to. If that's 20+ years away... bubbles mean nothing to you.
I'm not disagreeing with you.
I've even made chart's similar to what I think the OP was trying to show. Such as the one below, effectively using what's been dubbed the "SIegel Constant" after Prof. Jeremy Siegel's charts on the inflation adjusted total return growth in U.S. stocks, but I added a trend line from a peak and valley, which take you to very different end points.
I'm just pointing out that picking a known low point as the start of your trend line skews it to a much higher degree then starting from a past market high point, or even an "average" between high and low points.

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Re: Stock Bubble? History Argues the Contrary

Post by zuma »

watchnerd wrote: Sun Mar 28, 2021 9:22 am
ljford7 wrote: Sun Mar 28, 2021 8:38 am Go and do a quick google search for: overvalued stocks followed by a year. Every year in the recent past has lots of articles about overvalued stocks, yet the S&P has kept moving up and to the right.
And, ergo, it's a perpetual motion machine that must intrinsically increase in valuation forever with no upper boundary?

C'mon....

Look at the Nikkei.
No, I think the point is that short-term predictions are often wrong.
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Re: Stock Bubble? History Argues the Contrary

Post by watchnerd »

zuma wrote: Sun Mar 28, 2021 9:43 am
No, I think the point is that short-term predictions are often wrong.
Yes, in the short term.

And in the long term, years following high valuations have underperformed.
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Re: Stock Bubble? History Argues the Contrary

Post by sperry8 »

JoMoney wrote: Sun Mar 28, 2021 9:39 am
sperry8 wrote: Sun Mar 28, 2021 9:20 am
JoMoney wrote: Sun Mar 28, 2021 8:56 am
sperry8 wrote: Sat Mar 27, 2021 7:11 pm
JoMoney wrote: Sun Mar 21, 2021 10:42 am Why the 1933 start date? Seems odd to pick a year that's a known stock market low point as the start date for your growth line.
Doesn't seem to be have been a point that was "average" relative to growth starting in other years.
Pick the high point in 1928ish... line would still go way up and prove the same point
OP is using a chart based on price-only index.
Dec 30, 1928 S&P 500 was 24.35
Mar 26, 2021 S&P 500 close was 3,974.54
Roughly a 5.7% CAGR

From 1933 S&P 500 was 6.83
To the same current end date that's a 7.5% CAGR

Yahoo! FInance S&P 500 price history

Compounded over 80+ years those are going to be massively different trend lines. Over 80 years that's the difference between
$1 growing to $85 and
$1 growing to $330
Obviously you can finagle the starting point to show whatever point you're trying to show. The point is, over the long term, the line goes way up and to the right. Way up. Bubbles can't even be seen the further out you go. Don't understand all the focus on whether we're in a bubble or not. It's irrelevant. Buy & hold and only sell the portion you need, when you need to. If that's 20+ years away... bubbles mean nothing to you.
I'm not disagreeing with you.
I've even made chart's similar to what I think the OP was trying to show. Such as the one below, effectively using what's been dubbed the "SIegel Constant" after Prof. Jeremy Siegel's charts on the inflation adjusted total return growth in U.S. stocks, but I added a trend line from a peak and valley, which take you to very different end points.
I'm just pointing out that picking a known low point as the start of your trend line skews it to a much higher degree then starting from a past market high point, or even an "average" between high and low points.

Image
I hear you. It all falls within that band (was my point). But your point (and its well taken) is that there are great differences within that band depending on starting date.
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Re: Stock Bubble? History Argues the Contrary

Post by Thesaints »

If volatility is high enough, one is able to choose a starting and an end point pair that matches almost ANY return.
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Re: Stock Bubble? History Argues the Contrary

Post by sapphire96 »

I wanted to post an update given recent market gains. According to my calculations, we are around a 45-50% premium above modern historical average. It will be interesting to see if gains continue or if we are due for a retraction; still not changing my investment portfolio (100% stocks, 80% US/20% International).

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Re: Stock Bubble? History Argues the Contrary

Post by Blue456 »

sapphire96 wrote: Sun Mar 21, 2021 11:57 am
HootingSloth wrote: Sun Mar 21, 2021 10:49 am It would be great to see these same charts with the trend fixed by, say, a 1937 start date and 2009 end date as a robustness check that addresses JoMoney's point. How much does your qualitative assessment depend on the period chosen?
So for giggles, I just created an all-time exponential average. It would imply a few things...
1873-1897 had elevated prices with no growth.
The 1925-1929 "bubble" was never a bubble.
The US never got back to average until the 1960s, but barely.
Prices have been elevated since 1990 - the tech bubble never fully popped.
The bottom of the Great Financial Crisis crash had evaluations back to average.

The question I think arises was there a fundamental economic shift in the US starting in the 1930s that created a new exponential average growth line and does this create the possibility of a lower (or higher?) exponential growth line for the future.
Image
Or,
1930s-1960 US stocks were undervalued
1990- 2020 US stocks were overvalued

Now compare it to this graph below, you will roughly noticed that between 1960s-1990 international outperformed 3 times and 1990s to 2020s US outperformed 3 times. So maybe the US is outperforming its valuations since 1990s and is due for extended correction lets say another 30 or 60 years?
Robot Monster wrote: Tue Sep 15, 2020 8:21 am
Here's some data on those horses.

Image

You should also consider how historically pricey US vs ex-US has been when looking at past performance. Historical CAPE ratios:

Image
L84SUPR
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Re: Stock Bubble? History Argues the Contrary

Post by L84SUPR »

Several months ago Cathie Wood made the argument we were not in bubble territory because the slope of the CAPE had not steepened. That is now up for interpretation. As seen in the linked graph the slope of the CAPE may be on a new steeper slope, or it may drop back to the previous slope. It's like the old joke, how long does it take to tune a banjo... noooobody knooows.

Feel free to draw your own best fit lines and conclusions.

https://www.multpl.com/shiller-pe
stocknoob4111
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Re: Stock Bubble? History Argues the Contrary

Post by stocknoob4111 »

z3r0c00l wrote: Tue Mar 23, 2021 9:23 ambull lasting about 17-18 years, meaning we could see another 10 years of this.
the Shiller PE in 1990 was only 17, today it is almost 40.. big difference
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willthrill81
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Re: Stock Bubble? History Argues the Contrary

Post by willthrill81 »

stocknoob4111 wrote: Wed Sep 15, 2021 10:25 am
z3r0c00l wrote: Tue Mar 23, 2021 9:23 ambull lasting about 17-18 years, meaning we could see another 10 years of this.
the Shiller PE in 1990 was only 17, today it is almost 40.. big difference
So are interest rates. When CAPE was below 10 in the early 1980s, interest rates were sky high. Today, CAPE is nearly 40 but interest rates are in the basement.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
burritoLover
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Re: Stock Bubble? History Argues the Contrary

Post by burritoLover »

You can't determine when you are in a bubble and you also can't determine when you are not in a bubble. Pointless discussion - completely in-actionable. We'll know after the fact only.
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jeep5ter
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Re: Stock Bubble? History Argues the Contrary

Post by jeep5ter »

Regarding apocryphal shoeshine boy stories, my great grandfather was told by his broker to get out of the market and did so in August 1929. He paid off his mortgage and stayed out of the market until after WWII.
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Re: Stock Bubble? History Argues the Contrary

Post by TJat »

Haven’t read the whole thread but I think one of the limitations of back testing is that it assumes there is some repeatable relationship between eras. In reality, if stocks in 2025-2035 performed exactly as they did in 1925-1935, im not sure the performance from 1935-1945 would have any usefulness in telling us what would happen next.

I’ve theorized, but lack the time (and frankly ability), that constructing a model where each data point is each 3-year period in the past 100 years or so and a Monte Carlo is run on every possible permutation. I wonder if the 10th, 50th, and 90th percentiles would then give some interesting results of expected values with potential error bars around it.

More than likely it would just be some random noise, but I think any sort of back testing or forecasting is basically that. Another approach could be to construct some GBMs or something with a ton of a variables to project returns over the next 10 years. Presumably some think tank is paying people a ton to do just that, with value of tbd.
asif408
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Re: Stock Bubble? History Argues the Contrary

Post by asif408 »

willthrill81 wrote: Wed Sep 15, 2021 11:18 am
stocknoob4111 wrote: Wed Sep 15, 2021 10:25 am
z3r0c00l wrote: Tue Mar 23, 2021 9:23 ambull lasting about 17-18 years, meaning we could see another 10 years of this.
the Shiller PE in 1990 was only 17, today it is almost 40.. big difference
So are interest rates. When CAPE was below 10 in the early 1980s, interest rates were sky high. Today, CAPE is nearly 40 but interest rates are in the basement.
How do you explain that the CAPE ratio in the US was somewhere between 10-15 for most of the 1940s and 1950s when interest rates were about as low as they are now?

And looking outside the US, CAPE ratios for Hong Kong and Singapore in the early 1980s were in the 30s, so CAPE ratios aren't always low when interest rates are high (though it was true for many countries in the early 1980s). Conversely, today places like the UK, Japan, and much of Europe have CAPE ratios in the mid teens to low 20s, yet they have even lower interest rates. In the mid-2000s, Japan had a CAPE ratio in the 80s with bond yields slightly higher than today. Now their CAPE ratio is in the 20s with lower yields.

So I'm not seeing any strong association between lower interest rates and higher valuations, and the argument is even weaker when you look at multiple countries over longer time frames. The only way I would side with your view is if I ignore all pre-1980 data and all countries other than the US.
EddyB
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Re: Stock Bubble? History Argues the Contrary

Post by EddyB »

sapphire96 wrote: Sun Mar 21, 2021 11:43 am
JoMoney wrote: Sun Mar 21, 2021 10:42 am Why the 1933 start date? Seems odd to pick a year that's a known stock market low point as the start date for your growth line.
Doesn't seem to be have been a point that was "average" relative to growth starting in other years.
1933 was picked as the starting point because before this, the modern exponential average (which used 1950 through 2017 data points to generate) does not hold as the growth rate was much flatter. I recognize 1933 was a low point, but this appeared to be a visual end of the best fit line - otherwise, the modern best fit line would have gone below zero in the 1900s.
Coincidentally, 1933 was when the federal government overhauled securities regulation, initiating what remains the core of US securities regulation today.
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willthrill81
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Re: Stock Bubble? History Argues the Contrary

Post by willthrill81 »

asif408 wrote: Wed Sep 15, 2021 2:07 pm
willthrill81 wrote: Wed Sep 15, 2021 11:18 am
stocknoob4111 wrote: Wed Sep 15, 2021 10:25 am
z3r0c00l wrote: Tue Mar 23, 2021 9:23 ambull lasting about 17-18 years, meaning we could see another 10 years of this.
the Shiller PE in 1990 was only 17, today it is almost 40.. big difference
So are interest rates. When CAPE was below 10 in the early 1980s, interest rates were sky high. Today, CAPE is nearly 40 but interest rates are in the basement.
How do you explain that the CAPE ratio in the US was somewhere between 10-15 for most of the 1940s and 1950s when interest rates were about as low as they are now?

And looking outside the US, CAPE ratios for Hong Kong and Singapore in the early 1980s were in the 30s, so CAPE ratios aren't always low when interest rates are high (though it was true for many countries in the early 1980s). Conversely, today places like the UK, Japan, and much of Europe have CAPE ratios in the mid teens to low 20s, yet they have even lower interest rates. In the mid-2000s, Japan had a CAPE ratio in the 80s with bond yields slightly higher than today. Now their CAPE ratio is in the 20s with lower yields.

So I'm not seeing any strong association between lower interest rates and higher valuations, and the argument is even weaker when you look at multiple countries over longer time frames. The only way I would side with your view is if I ignore all pre-1980 data and all countries other than the US.
I haven't looked at enough data to form a robust opinion. But logically, there should be some kind of inverse relationship between CAPE and interest rates. While I'm only a sample size of one, if I could earn a 5% or higher guaranteed real return from fixed income instruments, I would own some in lieu of stocks, and I really doubt that I'm alone in that regard.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
asif408
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Re: Stock Bubble? History Argues the Contrary

Post by asif408 »

willthrill81 wrote: Wed Sep 15, 2021 2:37 pm
asif408 wrote: Wed Sep 15, 2021 2:07 pm
willthrill81 wrote: Wed Sep 15, 2021 11:18 am
stocknoob4111 wrote: Wed Sep 15, 2021 10:25 am
z3r0c00l wrote: Tue Mar 23, 2021 9:23 ambull lasting about 17-18 years, meaning we could see another 10 years of this.
the Shiller PE in 1990 was only 17, today it is almost 40.. big difference
So are interest rates. When CAPE was below 10 in the early 1980s, interest rates were sky high. Today, CAPE is nearly 40 but interest rates are in the basement.
How do you explain that the CAPE ratio in the US was somewhere between 10-15 for most of the 1940s and 1950s when interest rates were about as low as they are now?

And looking outside the US, CAPE ratios for Hong Kong and Singapore in the early 1980s were in the 30s, so CAPE ratios aren't always low when interest rates are high (though it was true for many countries in the early 1980s). Conversely, today places like the UK, Japan, and much of Europe have CAPE ratios in the mid teens to low 20s, yet they have even lower interest rates. In the mid-2000s, Japan had a CAPE ratio in the 80s with bond yields slightly higher than today. Now their CAPE ratio is in the 20s with lower yields.

So I'm not seeing any strong association between lower interest rates and higher valuations, and the argument is even weaker when you look at multiple countries over longer time frames. The only way I would side with your view is if I ignore all pre-1980 data and all countries other than the US.
I haven't looked at enough data to form a robust opinion. But logically, there should be some kind of inverse relationship between CAPE and interest rates. While I'm only a sample size of one, if I could earn a 5% or higher guaranteed real return from fixed income instruments, I would own some in lieu of stocks, and I really doubt that I'm alone in that regard.
I don't disagree there might be some kind of inverse relationship, but there certainly is no evidence of a strong relationship. If that relationship held up across multiple countries and multiple time periods, I would be willing to concede. But in the examples I listed above the relationship falls apart.

So if you want to say valuations could be 5 or 10% higher based on current valuation I could go along with that. But if you think valuations that are 50% more or greater than historical are justified by current interest rates I'm not buying it, which is pretty much where we are now. And if you believe valuations are justified in the US then you should view valuations outside the US as being attractive, with their combination of low interest rates and average historical valuations.

So it doesn't really matter if there is a bubble or not. All that should matter to the long term investor is, whether or not we experience a crash in the future, at the end of the next decade or two we can assign a higher probability of a better potential return from foreign stocks and value stocks worlwide than US stocks, whatever that return might be. And most US and international stock indexes would be expected to beat bonds over the next few decades, even if all your money is in a US Total Market Index fund, simple because bond yields are so low. The exception might be those who heavily overweight the high flying growth stocks, of which there are quite a number.
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