Are stocks dangerously overvalued? Not according to new Vanguard yardstick

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Dead Man Walking
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Dead Man Walking »

Over the last decade interest rates have been very low. Has the stock market ever been stimulated by abnormally low interest rates as it has been over the last decade? Low rates seem to have been a global phenomenon. I ask this question because I don't know if this period is an historical anomaly or if such periods have occurred previously.

DMW
gips
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by gips »

Grt2bOutdoors wrote: Mon Jul 30, 2018 5:08 pm
gips wrote: Mon Jul 30, 2018 4:34 pm fwiw, one of my wall st. ex-colleagues changed his equity allocation to zero based on the current cape ratio. However, there's so much press about poor expected returns, he's thinking it may be time to get back in :wink:
We know how precise and accurate Wall Street has been with predictions.
well, his job isn't to make wall st predictions but he's done a better job than most in shepherding his assets. he has a very sophisticated understanding of financial markets/finance and economics and he looks at things through a different lens.
selters
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by selters »

deltaneutral83 wrote: Mon Jul 30, 2018 3:34 pm 5% nominal for the next ten years on the S&P would result in the worst rolling 30's for nominal (or real) since before the reliable data was available.
But rolling 35 year returns would be just fine. The late 90s had extraordinarily high returns, which ate up some future returns.
asif408
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by asif408 »

Dead Man Walking wrote: Mon Jul 30, 2018 7:50 pm Over the last decade interest rates have been very low. Has the stock market ever been stimulated by abnormally low interest rates as it has been over the last decade? Low rates seem to have been a global phenomenon. I ask this question because I don't know if this period is an historical anomaly or if such periods have occurred previously.

DMW
I'm not sure I have a good answer, but at least in the US the 3 month T-bill from 1934-1947 was under 0.5%: http://pages.stern.nyu.edu/~adamodar/Ne ... retSP.html. That was longer than the current stretch. During that time the Shiller CAPE was between 8 and 22.

I'm not sure about outside the US, would be interesting to know.
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Toons
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Toons »

Dottie57 wrote: Mon Jul 30, 2018 7:14 pm
gmaynardkrebs wrote: Mon Jul 30, 2018 5:19 pm
Toons wrote: Mon Jul 30, 2018 5:11 pm Overvalued.
Undervalued,
Makes no difference.
Keep Investing.

:happy
And the effect will be...what?
You will own more shares.
Thank You
You Are On Your Way To Wealth Creation :happy :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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El Greco
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by El Greco »

I would comment, but my crystal ball is in the shop being polished. :P
mbasherp
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by mbasherp »

I use 5% annual as my own estimate for the next 30+ years. Why? It’s a nice moderate number which doesn’t get me too hyped with expectation but still represents significant compounding over time. Doesn’t matter if I’m right or not; I don’t base my savings/investment off of expected returns. I base it off available funds.

The useless contrarian in me is beginning to wonder how different reality will be from expectation since it seems almost everyone is calling for low returns going forward. What if 20 years from now, the narrative of these days is that we were all gun shy after two huge financial crises in a row (2000/2008), pretended that a bear market didn’t happen (2016) and kept waiting for the other shoe to drop for far too long? It’s just as likely, in my opinion.
GAAP
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by GAAP »

I do use Shiller PE for estimating purposes. I am quite happy if it underestimates future results -- my portfolio will "out-perform". The other way around is not so good...
Notes: For the real-time analysis, the regression coefficients are determined recursively, starting with 10-year trailing annualized returns from January 1901–December 1959 data and re-estimating the regression coefficients with the addition of data for each month thereafter.
This strikes me as a real pain to use for my purposes. It also sounds like a curve-fitting exercise that may or may not provide much value. If I really wanted to do it, I could probably create a regression formula that exactly matched past results -- and would tell me nothing reliable for planning. Shiller PE is rough, but that's all I need.
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nedsaid
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by nedsaid »

Larry Swedroe sent me personal messages regarding CAPE and current valuations. He was responding to comments that I made on the forum. Here are excerpts from our exchange, this might add to the discussion here.

Larry Swedroe said: The research shows it (CAPE or PE 10) is about as good a predictor of longer term returns as we have, but it still only explains about 40% of future 10 year returns (changing ERP explains most of rest, and that of course is not predictable).

But we do know that higher CAPE leads to lower mean return, lower best return and worse worst return, monotonically and vice versa.

Note we have also seen incredible rise in profit margins and capital's share vs labor share of GNP move in favor of capital, and that is one thing that does tend to mean revert---so at least is warning.

And of course the tax cut led to huge increase in earnings, helping to bring down the valuations-

So it's a provider of USEFUL information, but still wide dispersion of returns possible, which is why one runs MCS
Nedsaid said:
In regards to your comments about valuations, we are largely in agreement. Though P/E ratios are lower, I noted that recent earnings have been very strong. I have commented that both earnings growth and optimistic earnings forecasts may not be sustainable. The counterargument is that if economic growth is 3% plus going forward then market optimism is warranted. We will see. Valuations are in the eye of the beholder but I just could not help but notice P/E contraction, particularly with trailing P/E ratios.
Nedsaid said:
I am also reacting to the fact that PE10 is so high compared to very recent market PE ratios both forward and trailing PEs. My comment is that something is amiss here.

The market in my mind is getting closer and closer to where I would put an outright "buy" on it. PEs have been coming down because of recently very strong earnings but also because of rising short term interest rates. I am beginning to believe that the market is no longer expensive. Just couldn't believe the PE ratios of Value funds, anywhere from 13 to 15. Forward PE's of such funds had been 17 or 18 for quite some time.

I don't buy the assertion that the US Market is at historically high valuations. Not yet ready to call the US market cheap but it certainly isn't expensive. I would argue that the economy was kept below its potential by US Government policies, mainly overregulation. We had the "new normal" of 2% and now is looks like sustainable economic growth going forward will be 3%. This is huge. We thought the market was expensive but that was because of an underperforming economy and very low interest rates.
Nedsaid said:
Yes 3% growth is about average but is a big boost from the "new normal" 2% growth. The US Economy is so much bigger now than even the 1980's, as the economy gets bigger and bigger, it is harder to sustain faster rates of growth over time.
Larry Swedroe said:
basically agree but 3% gnp growth is only about historical average, nothing special. Keep that in mind. And while valuations coming down still relatively high and margins are way above average, and not likely sustainable, but possible of course
Larry Swedroe said:And not surprised most people have not heard of CAPE 10, and it has VERY WIDE dispersion of outcomes as I have written about, but 40% explanatory power is a lot, and certainly contains valuable information when you see those monotonic shifts in best, means and medians. Only a fool would ignore IMO

Be very careful with the more current valuations, think making mistake of thinking all things equal. Both margins and profits as % of GNP are at records and with low UE (unemployment) that historically and logically leads to shift of percentages to favor labor, not capital. With that said, I do believe there is logical reason for the figures to have risen due to capital becoming more and more a percent of GNP itself and labor less. And this is being virtually totally ignored. But still .... Of course my crystal ball cloudy as always

Note valuations no where near "buy" which would be at say low double digits or high single digits like in 09. And as you note value stocks should be say 12 for large and 10 for small, so still very high
A fool and his money are good for business.
Grt2bOutdoors
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Grt2bOutdoors »

Morgan Stanley did not get the Vanguard memo.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
KlangFool
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool »

mbasherp wrote: Tue Jul 31, 2018 9:57 am I use 5% annual as my own estimate for the next 30+ years. Why? It’s a nice moderate number which doesn’t get me too hyped with expectation but still represents significant compounding over time. Doesn’t matter if I’m right or not; I don’t base my savings/investment off of expected returns. I base it off available funds.

The useless contrarian in me is beginning to wonder how different reality will be from expectation since it seems almost everyone is calling for low returns going forward. What if 20 years from now, the narrative of these days is that we were all gun shy after two huge financial crises in a row (2000/2008), pretended that a bear market didn’t happen (2016) and kept waiting for the other shoe to drop for far too long? It’s just as likely, in my opinion.
mbasherp,

5% real return (after inflation adjustment) or 5% nominal (before inflation adjustment)?

I use a 5% nominal for my planning purposes.

KlangFool
mbasherp
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by mbasherp »

KlangFool wrote: Tue Jul 31, 2018 2:52 pm
mbasherp,

5% real return (after inflation adjustment) or 5% nominal (before inflation adjustment)?

I use a 5% nominal for my planning purposes.

KlangFool
5% nominal. But again, it doesn't really matter beyond generating mostly useless spreadsheets far into the future. We can all discuss predictions as much as we want about what the future will hold, but it'll only be one thing when it arrives AND we won't know for sure whatsoever in advance. So I take my own guesstimates with a grain of salt and I certainly don't change my contributions based on what I think investment returns might be.
KlangFool
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool »

mbasherp wrote: Wed Aug 01, 2018 7:36 am
KlangFool wrote: Tue Jul 31, 2018 2:52 pm
mbasherp,

5% real return (after inflation adjustment) or 5% nominal (before inflation adjustment)?

I use a 5% nominal for my planning purposes.

KlangFool
5% nominal. But again, it doesn't really matter beyond generating mostly useless spreadsheets far into the future. We can all discuss predictions as much as we want about what the future will hold, but it'll only be one thing when it arrives AND we won't know for sure whatsoever in advance. So I take my own guesstimates with a grain of salt and I certainly don't change my contributions based on what I think investment returns might be.
mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
GAAP
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by GAAP »

KlangFool wrote: Wed Aug 01, 2018 7:51 am mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
KlangFool
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool »

GAAP wrote: Wed Aug 01, 2018 9:23 am
KlangFool wrote: Wed Aug 01, 2018 7:51 am mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
GAAP,

1) None of the above. I just assume that for a 61/39 to 60/40 portfolio, it will average about 5% nominal over the next 3 to 4 years. If not, I will work one more year if I can. Or else, I have a plan B, C, and D.

2) I save 1 year of expense every year and my portfolio is about 20X now. So, I do not need to worry about the return that much.

KlangFool
2015
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by 2015 »

HomerJ wrote: Mon Jul 30, 2018 3:29 pm
vineviz wrote: Mon Jul 30, 2018 3:18 pm
WanderingDoc wrote: Mon Jul 30, 2018 3:12 pm
vineviz wrote: Mon Jul 30, 2018 2:24 pm
WanderingDoc wrote: Mon Jul 30, 2018 2:20 pm People come up with all sorts of "models" to make themselves feel better, it helps them sleep better at night. That is human nature. Similar to changing how the way unemployment was calculated/reported, changing how quarterly earnings are reported, changing how CAPE is reported, changing how the trade deficit is reported, changing how the federal balance sheet is reported, etc. Of course someone wants to feel better about a situation. We simply convince ourselves that it isn't as "bad" as we think.
Also, some people are inherently intellectually curious and seek to deepen their understanding of how the world works.
Not when all of it goes in the exact same direction.
Like I said , some of us are just interested in getting smarter.

If that doesn’t interest you, a forum called “Investing - Theory” probably isn’t going to excite you very much.
You may not actually be getting smarter.
Well said.

I do compliment Vanguard on this piece of marketing disguised as "information". What makes this kind of financial noise dangerous isn't the noise itself, but the propensity of "students of investing" to do stupid things with it (that is, take counterproductive actions). One prediction that has remained unchanged throughout history is that "students of investing" are their own worst enemy.
Random Walker
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Random Walker »

https://alphaarchitect.com/2018/08/03/a ... ape-ratio/

Guys at alpha Architect interviewed one of the authors in this article here.

Dave
Grt2bOutdoors
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Grt2bOutdoors »

KlangFool wrote: Wed Aug 01, 2018 9:34 am
GAAP wrote: Wed Aug 01, 2018 9:23 am
KlangFool wrote: Wed Aug 01, 2018 7:51 am mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
GAAP,

1) None of the above. I just assume that for a 61/39 to 60/40 portfolio, it will average about 5% nominal over the next 3 to 4 years. If not, I will work one more year if I can. Or else, I have a plan B, C, and D.

2) I save 1 year of expense every year and my portfolio is about 20X now. So, I do not need to worry about the return that much.

KlangFool
You saved 20x, in cash? Or bonds only? If in equities it is at risk of permanent loss.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
KlangFool
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by KlangFool »

Grt2bOutdoors wrote: Fri Aug 03, 2018 7:17 pm
KlangFool wrote: Wed Aug 01, 2018 9:34 am
GAAP wrote: Wed Aug 01, 2018 9:23 am
KlangFool wrote: Wed Aug 01, 2018 7:51 am mbasherp,

To you, it is 30+ years into the future. To me, it is the next 3 to 4 years.

KlangFool
I'm guessing you plan to retire in 3-4 years, but if not then are you using Shiller PE for shorter terms than 10-15 years? If so, how?
GAAP,

1) None of the above. I just assume that for a 61/39 to 60/40 portfolio, it will average about 5% nominal over the next 3 to 4 years. If not, I will work one more year if I can. Or else, I have a plan B, C, and D.

2) I save 1 year of expense every year and my portfolio is about 20X now. So, I do not need to worry about the return that much.

KlangFool
You saved 20x, in cash? Or bonds only? If in equities it is at risk of permanent loss.
Grt2bOutdoors,

1) 1 year of emergency fund plus a half year of college expense.

2) 61/39 -> 61% stock 39% fixed income

3) I can survive about 5 years of the downturn without a permanent loss.

4) After 5 years, money is no longer the biggest problem.

KlangFool
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by stlutz »

I know if there is a CAPE thread everybody has to go to their corners, but does anybody have any thoughts on the "improvements" Vanguard has suggested to the model?

Namely that one should incorporate: a) real bond yields, b) expected inflation rates, and c) financial volatility into their forecast of what CAPE will be in the future?

One common way to look at estimating long-term returns is to consider:

1) the current yield
2) estimated earnings growth
3) future market multiples vs. current market multiples.

Their proposal only comments on #3. Do people think on a conceptual level that the factors they suggest considering are better than simply assuming mean reversion or no change (the most common approaches that are discussed here)?
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nedsaid
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by nedsaid »

stlutz wrote: Fri Aug 03, 2018 7:55 pm I know if there is a CAPE thread everybody has to go to their corners, but does anybody have any thoughts on the "improvements" Vanguard has suggested to the model?

Namely that one should incorporate: a) real bond yields, b) expected inflation rates, and c) financial volatility into their forecast of what CAPE will be in the future?

One common way to look at estimating long-term returns is to consider:

1) the current yield
2) estimated earnings growth
3) future market multiples vs. current market multiples.

Their proposal only comments on #3. Do people think on a conceptual level that the factors they suggest considering are better than simply assuming mean reversion or no change (the most common approaches that are discussed here)?
Markets are a many sided thing. For stocks, it is mostly about earnings and expectations of earnings. Of course other things come into play here: the state of the economy, the level of interest rates, the emotion of the investing public, etc. You throw in human emotion, it makes all of this hard to predict. Markets are very complex and even the best of models have their inadequacies. The one thing you don't expect to happen does happen and at the wrong possible time. No matter how smart you are there are things you cannot anticipate.

The definition of earnings by the accountants has gotten more conservative over the time. Two key examples are treatment of stock options and the treatment of goodwill. Perhaps a market P/E of 16 in 1970 would be the equivalent of 20 today. Also as companies are becoming more dependent upon intangible assets, the accountants have a harder and harder time putting an accurate value on the company. Book value as a measure is becoming increasingly irrelevant. So the valuation yardsticks we use are changing as well. Comparing book value and P/E with historical numbers is becoming harder and harder. With these arguments in mind, you could say earnings are vastly understated for some companies. How do you record on the books vast increases in the value of intangible assets, this is a judgment of the markets and not the accountants. Shouldn't a vast increase in stock price somehow be reflected in earnings?

What I am saying is that the measuring sticks are flawed because real life is very complicated. How to you define earnings? How do you define book value? I am sure there are many other theoretical questions that could be raised about accounting standards. Point is that someone has to make a judgment and those judgments are imperfect. So the collective wisdom of the markets makes up for, or tries to make up for, the limitations of accounting.

This is why it is so darned hard to determine whether markets are expensive or cheap. To a large degree, valuation is in the eye of the beholder. We pretend this is more objective than it really is. We are really dealing with informed and educated judgments and guesses and not with precise numbers.
A fool and his money are good for business.
GAAP
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by GAAP »

stlutz wrote: Fri Aug 03, 2018 7:55 pm I know if there is a CAPE thread everybody has to go to their corners, but does anybody have any thoughts on the "improvements" Vanguard has suggested to the model?

Namely that one should incorporate: a) real bond yields, b) expected inflation rates, and c) financial volatility into their forecast of what CAPE will be in the future?

One common way to look at estimating long-term returns is to consider:

1) the current yield
2) estimated earnings growth
3) future market multiples vs. current market multiples.

Their proposal only comments on #3. Do people think on a conceptual level that the factors they suggest considering are better than simply assuming mean reversion or no change (the most common approaches that are discussed here)?
That depends on how you define "better". I have no doubt that you could build an equation that better fits the historical data. Jumping from there to saying it makes a better projection for the future is something else entirely.

Adding multiple terms to an equation also adds multiple factors to get wrong and multiple ways to change the end result. #2 has the extra disadvantage of being an estimate -- meaning that the final estimated result is potentially determined by a prior estimated input. That compounded error is one reason I prefer to use a single real number earnings estimate instead of nominal earnings and inflation.

I'm quite happy with an estimate that works in my favor -- and underestimating actual returns does just that. I like positive surprises, negative ones not so much.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess »

vineviz wrote: Mon Jul 30, 2018 6:43 am Vanguard has an article on their website summarizing their recent paper, Improving U.S. Stock Return Forecasts: A "Fair-Value" CAPE Approach, published in the Winter 2018 issue of The Journal of Portfolio Management.
At the end of 2017, the Shiller CAPE (cyclically adjusted price to earnings) ratio was flirting with all-time highs, surpassed only by the peaks that preceded the collapse of the dotcom bubble. It stood at about 33; its historical average is about 16. A reversion to the ratio's long-term average would bode ill for future stock returns.

Vanguard's "fair-value" CAPE ratio paints a less alarming picture, suggesting that valuations are indeed high but not in the "bubble" territory implied by the conventional CAPE. We expect the returns of U.S. stocks to fall below their historical averages over the next ten years. The most likely outcome, according to our projections, is annualized returns of 3%–5% for the coming decade.
In short, Vanguard proposes an "enhancement to standard CAPE-based forecasts that conditions mean reversion in the CAPE ratio on real (not nominal) bond yields, expected inflation rates, and financial volatility in a VAR model".
There are two ways to get poor returns in the next 10 years (as that is what CAPE is predicting):
- massive crash (followed by recovery),
- low but steady returns.

I would argue that, for long term investors in the accumulation stage, that second scenario is probably worse.

In addition, this study could also be classified under the category, 'Yet another overfitted research'.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess »

vineviz wrote: Mon Jul 30, 2018 10:41 am One possible action you could take is to start saving more money if your current retirement plan is based on an assumption of 10% or 12% stock returns over the next decade.

Don't laugh: there are people doing this.
Upvote * 100.

Also, all those 'safe' withdrawal rate models need to be adjusted for low return for the next 10-20 years.

Withdrawing 3.5% might be too much in the next 20 years.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess »

El Greco wrote: Tue Jul 31, 2018 9:35 am I would comment, but my crystal ball is in the shop being polished. :P
You are lucky. Mine got shattered a long time ago.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess »

Grt2bOutdoors wrote: Tue Jul 31, 2018 12:42 pm Morgan Stanley did not get the Vanguard memo.
What makes you say that?
Or, more precisely, why would you think that Morgan Stanley is subscribed to Vanguards public service announcements?
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by corn18 »

Yeah, this time it's different.
Don't do something, just stand there!
david1082b
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by david1082b »

corn18 wrote: Sun Aug 05, 2018 6:37 pm Yeah, this time it's different.
Current S&P 500 CAPE is 32.67, and looking at early the summer of 1929 and summer of 1997 we can see very different returns for the next few years from the same numbers. So yes in the past it was different when there was a similar runup to such a high-looking level. Summer of 1929 to summer of 1932 saw minus 80% return or so, 1997 to 2000 saw 60% return. The ten-year returns were very different too, 1929-1939 saw no return while 1997 to 2007 saw a doubling. "It's always different" is more accurate than "this time is different". Even moderate CAPE numbers have resulted in bad performance over certain time-spans. July 1927 saw a CAPE of 15.81, not a number to cause concern, but by July 1932 the total return had been minus 44%, because the Great Depression occured. Economic situations and investor sentiment play a huge role in sequence of returns. October 1987 saw a crash from a moderate CAPE number too. 1997 to early 2009 saw no return of course, but that is what can happen from even average CAPE numbers. This just shows that risk can appear at any time.

Data sources:

https://dqydj.com/sp-500-return-calculator/
http://www.multpl.com/shiller-pe/table?f=m
Last edited by david1082b on Sun Aug 05, 2018 8:25 pm, edited 1 time in total.
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corn18
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by corn18 »

david1082b wrote: Sun Aug 05, 2018 8:19 pm
corn18 wrote: Sun Aug 05, 2018 6:37 pm Yeah, this time it's different.
Current S&P 500 CAPE is 32.67, and looking at early the summer of 1929 and summer of 1997 we can see very different returns for the next few years from the same numbers. So yes in the past it was different when there was a similar runup to such a high-looking level. Summer of 1929 to summer of 1932 saw minus 80% return or so, 1997 to 2000 saw 60% return. The ten-year returns were very different too, 1929-1939 saw no return while 1997 to 2007 saw a doubling. "It's always different" is more accurate than "this time is different". Even moderate CAPE numbers have resulted in bad performance over certain time-spans. July 1927 saw a CAPE of 15.81, not a number to cause concern, but by July 1932 the total return had been minus 44%, because the Great Depression occured. Economic situations and investor sentiment play a huge role in sequence of returns. October 1987 saw a crash from a moderate CAPE number too. 2007 to early 2009 saw no return of course, but that is what can happen from even average CAPE numbers. This just shows that risk can appear at any time.

Data sources:

https://dqydj.com/sp-500-return-calculator/
http://www.multpl.com/shiller-pe/table?f=m
Sure. And past performance is a good indicator of future returns. We sure do a lot of yammering on on BH.org about how to predict the future when nobody knows nuthin'.

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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Grt2bOutdoors »

AlphaLess wrote: Sun Aug 05, 2018 6:03 pm
Grt2bOutdoors wrote: Tue Jul 31, 2018 12:42 pm Morgan Stanley did not get the Vanguard memo.
What makes you say that?
Or, more precisely, why would you think that Morgan Stanley is subscribed to Vanguards public service announcements?
It’s a joke. But Morgan Stanley should read what the competition is saying/doing, it’s smart business sense to know what the others are doing.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess »

corn18 wrote: Sun Aug 05, 2018 8:25 pm Image
Your chart is very educational.

What it is saying is that future returns will be lousy, on average, with high volatility.
Also, the fact that 3-year returns can be so positive in that little "YES" cluster simply pushes you to higher valuations.
The regression line in that scatter is clearly statistically significantly negatively sloped.
So: higher ShillerPE => lower future returns.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by marcopolo »

AlphaLess wrote: Sun Aug 05, 2018 8:58 pm
corn18 wrote: Sun Aug 05, 2018 8:25 pm Image
Your chart is very educational.

What it is saying is that future returns will be lousy, on average, with high volatility.
Also, the fact that 3-year returns can be so positive in that little "YES" cluster simply pushes you to higher valuations.
The regression line in that scatter is clearly statistically significantly negatively sloped.
So: higher ShillerPE => lower future returns.
I would caution against drawing too many conclusions from such small data sets.
Based on this chart, One could just as reasonably conclude that the risk of large losses (>25% loss), and volitility is less for CAPE > 35 than it is for CAPE between 20 and 30.

To paraphrase, "if you torture the data enough, it will confess to anything you want"
Once in a while you get shown the light, in the strangest of places if you look at it right.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by am »

How is this actionable? Should we save more, reduce/increase stock allocation, invest in something else?
AlphaLess
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by AlphaLess »

am wrote: Sun Aug 05, 2018 9:23 pm How is this actionable? Should we save more, reduce/increase stock allocation, invest in something else?
Exactly: how is this actionable.

I think - and take it with a grain of salt - the only actionable part here is that if you are retiring now, or plan to retire in the future, your realistic sustainable withdrawal rates are LOWER when Shiller PE is higher.

To make it a bit more actionable: what should my withdrawal rate be, given the CURRENT macroeconomic environment, would a better solution. But putting an actual number is probably harder to do.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by vineviz »

corn18 wrote: Sun Aug 05, 2018 8:25 pm
david1082b wrote: Sun Aug 05, 2018 8:19 pm
corn18 wrote: Sun Aug 05, 2018 6:37 pm Yeah, this time it's different.
Current S&P 500 CAPE is 32.67, and looking at early the summer of 1929 and summer of 1997 we can see very different returns for the next few years from the same numbers. So yes in the past it was different when there was a similar runup to such a high-looking level. Summer of 1929 to summer of 1932 saw minus 80% return or so, 1997 to 2000 saw 60% return. The ten-year returns were very different too, 1929-1939 saw no return while 1997 to 2007 saw a doubling. "It's always different" is more accurate than "this time is different". Even moderate CAPE numbers have resulted in bad performance over certain time-spans. July 1927 saw a CAPE of 15.81, not a number to cause concern, but by July 1932 the total return had been minus 44%, because the Great Depression occured. Economic situations and investor sentiment play a huge role in sequence of returns. October 1987 saw a crash from a moderate CAPE number too. 2007 to early 2009 saw no return of course, but that is what can happen from even average CAPE numbers. This just shows that risk can appear at any time.

Data sources:

https://dqydj.com/sp-500-return-calculator/
http://www.multpl.com/shiller-pe/table?f=m
Sure. And past performance is a good indicator of future returns. We sure do a lot of yammering on on BH.org about how to predict the future when nobody knows nuthin'.

Image
The article, FWIW, is notable precisely because Vanguard has already figured out a solution to the problem your chart purports to illustrate.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by FIby45 »

asif408 wrote: Mon Jul 30, 2018 10:52 am Assuming their yardstick is true, does this mean that foreign markets are even cheaper? If we make a fair value CAPE for the US, I am assuming it should also be applied globally, unless we think the US stock market is special.
Good point
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by dmcmahon »

vineviz wrote: Mon Jul 30, 2018 10:41 am One possible action you could take is to start saving more money if your current retirement plan is based on an assumption of 10% or 12% stock returns over the next decade.
Or look at markets overseas that are less pricey.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by rj49 »

WanderingDoc wrote: Mon Jul 30, 2018 2:20 pm People come up with all sorts of "models" to make themselves feel better, it helps them sleep better at night. That is human nature. Similar to changing how the way unemployment was calculated/reported, changing how quarterly earnings are reported, changing how CAPE is reported, changing how the trade deficit is reported, changing how the federal balance sheet is reported, etc. Of course someone wants to feel better about a situation. We simply convince ourselves that it isn't as "bad" as we think."

The same goes for those trying to convince us it isn't as "good" as we think. According to John Hussman, the stock market has been dangerously overvalued for over a decade, and he shows lots of charts to prove it (while apologizing in every article about how he misinterpreted his magic charts to not advise buying at the market low). Marc Faber and Gary Schilling and others are always ready to pronounce doom, with Treasuries and gold your only salvation. Jeremy Grantham used to just predict stock market doom (unless you invest in potash and timber), but now he makes even more dire warnings about climate disaster. And long-time Bogleheads might remember an annoying troll who would chime on in every thread in the early 2000s warning about impending market collapse, with the only salvation through TIPS.

At the other end of the investing spectrum, some writers and academics have been predicting bond carnage from increasing interest rates and hyperinflation from huge levels of government debt. A lot of posters on here are particularly prone to freak out whenever bond fund NAVs fall (while at the same time lamenting low yields, if they're a retiree).

As in most things, the reliable voice of moderation and reason came from John Bogle, who would give simple Gordon-equation type of estimates for stocks, and the bond forecast of future returns=current yield. Even when he looked temporarily wrong (such as 2000-2007, when small/value/REITs/foreign soared), he was right again when a good old TSM fund beat all the slicing and dicing since 2007, and his age-in-bonds rule would have spared a lot of pain during the two big stock crashes. I can admit that I would have been much better off if I'd have followed his simple rules and advice all of my investing life.
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by Ferdinand2014 »

KlangFool wrote: Mon Jul 30, 2018 9:11 am
jadd806 wrote: Mon Jul 30, 2018 8:47 am
KlangFool wrote: Mon Jul 30, 2018 8:15 am OP,

Another point of view:

https://www.peakprosperity.com/blog/114 ... -coal-mine

The recent stock run is driven by the FAANG aka 5 stocks.

KlangFool

P.S.: Unless you are 100% stock, none of this matters to you. You just buy according to your AA. You would not be buying the stock now due to your AA. If you are 100% stock, I wish you the best of luck.
How is this any different than the stock markets of any other era? Historically, a minority of stocks in the S&P 500 have accounted for the majority of the gains.

Even if Amazon "dies," that probably won't concern you. Their market cap would flow to other companies in the index such as Walmart or some other upstart that hasn't even been invented yet. The market for the services they provide is there and thanks to capitalism, that need will be filled (or succeeded by something else entirely). If you are a true index fund investor, you really do not need to care about things like this.
jadd806 ,

<<Historically, a minority of stocks in the S&P 500 have accounted for the majority of the gains.>>

Is this true? Is it at the same scale as the FAANG?

<<If you are a true index fund investor, you really do not need to care about things like this.>>

I am not a 100% stock person. So, it won't matter to me whether the stock market is overvalued.

KlangFool
1.3% of global stocks account for almost all of the market gains over the past 30 years.

https://poseidon01.ssrn.com/delivery.ph ... 09&EXT=pdf

“we find that the top-performing 1.3% of firms account for the $US 44.7 trillion in global stock market wealth creation from 1990 to 2018. Outside the US, less than one percent of firms account for the $US 16.0 trillion in net wealth creation. These results highlight the practical implications of the fact that the distribution of long-run stock returns is strongly positively skewed.”

A few stocks always account for the lions share. Nothing new.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett
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Re: Are stocks dangerously overvalued? Not according to new Vanguard yardstick

Post by RAchip »

My parents were 100% individual
stocks their whole lives through every up and down. It made them rich.
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