U.S. stock valuations haven’t been this extreme since 1929 and 2000 | Hacker News Reader

U.S. stock valuations haven’t been this extreme since 1929 and 2000

marketwatch.com

88 pointsomarchowdhury78 comments

If you're working a job that isn't directly related to the stock market, and are not about to retire, then you really shouldn't care if the stock market is about to crash or not.

Set up automatic investments into a Vanguard Target Retirement fund (or whatever), and know that whenever the next crash does come, you'll get an exceptionally good deal that month.

Here's some good advice on the subject: http://www.mrmoneymustache.com/2017/06/20/next-recession/

>a job that isn't related to the stock market

No such thing, except for maybe the government. If your business isn't sensitive to its stock price, its customers/suppliers/financiers are. Or their customers/suppliers/financiers are. Everything is connected, if you exist in the modern economy, you don't exist in a vacuum.

You're correct, I'm gong to edit it to say "not directly related", but the point I was trying to get to remains: don't worry about things that you have absolutely no control over and no good reason to worry about.

I'm sorry but that's just awful advice. Just because you don't have control over something doesn't mean you can't foresee it and take appropriate action to protect yourself in advance.

The automatic investments part is the appropriate action for most people to protect themselves in advance.

You cannot time the stock market. Trying to predict a crash and taking money out in an attempt to avoid losses is a recipe for disaster.

For individual investors who use the stock market for their retirement funds, the appropriate action to protect oneself from the fluctuations of the market, including crashes, is to have the appropriate retirement target set, along with the proper level of acceptable risk (which automatically allocates the funds among different asset classes). After that, it's a matter of waiting... and not doing anything rash during extreme events.

The reality is a little more nuanced, as the discussion was about the effects of stock market crashes on the real world: It's possible identify periods of high risk for stock market crashes. It's hard to make money on the stock market using this information, but you can apply it to decisions in areas of life you think would be affected by a stock market crash.

There is a way on how to time a recession, that is able to indicate it right before it happens, see:

http://www.philosophicaleconomics.com/2016/02/uetrend/

And it is also possible to have a slightly better ROI than buy and hold, even if you don't have the timing of future recession dates. See http://www.philosophicaleconomics.com/2016/01/gtt/

In that last article, you also see that "perfect recession timing" (looking backwards instead of to the future) actually doesn't have that much improvement over buy and hold. So for me, it doesn't seem like the return is worth the effort, so I just buy and hold.

>have the appropriate retirement target set, along with the proper level of acceptable risk

You make that sound so easy. It's not. None of the maths of retirement planning is hard - but the actual decisions really kind of are.

For example, I've got 10% in corporate debt. Is that more or less risky than Equity? What's the distribution? What's the correlation? How does it compare with Reinsurance, or Property? Is property strongly correlated with the stock market at the tails, or is it a diversifying asset class? Does my passive fund hedge currency risk? Do I want it to? Is private equity a good or a bad idea? Do I want FTSE ALL or FTSE 100?

How about looking at risk appetite. What is the most time it could take for my retirement savings to recover to inflation adjusted parity after a crash (I feel like 15 years is the historical max, but it's a vague memory). Should I look at risk in terms of retirement income or retirement date? Do I expect Annuity rates to improve (e interest rates to go up) or should I mark to current rates for planning purposes.

I think about the amount of context that trustees for DB pension schemes needed to make investment decisions that were sound, and I can't help but wonder how we've ended up with individuals making these decisions on their own. I've long felt that outside of fees Diversified Growth Funds (Multi Asset Funds?) are a pretty good place to "inactively" manage retirement savings. After fees I'm less convinced. I suspect the Australian model might be closest to what I internally model as best?

If it's any consolation, 2008/9 proved that everything is pretty much correlated--stocks went down, bonds went down, everything went down. There were no safe havens except for massive government bailouts. To this day, the illegal acts that banks undertook to stay afloat have not been prosecuted (moving all unperforming assets to "off balance sheet vehicles" like holding companies). Also, mark-to-market accounting was suspended and has never been reinstated.

One notable exception: Farm land.

Please read the above advice! In 2008, I saw the crash coming. I got tipped off, kind of: My bank was NetBank and it was the first one to fail. I pulled all my money out of stocks and sat out the crash. Brilliant, right? Yeah, except in 2010, I didn't re-invest it! I sat on a lot of cash and missed out on tons of gains. So while I preserved my wealth (and that was dicey because Money Markets nearly collapsed and that's where all my "cash" was). Had I stayed invested I would have taken some paper losses but I would have come out further ahead by now.

My one concern is that these markets are just pretend bs because of QE and the effects money printing has had on all assets.

Many jobs are tied to the stock market that aren't obvious.

Even though the circumstances were different, in 2001 I was a contractor on Sabre's HR team. 9/11 devastated the stock, so much of the software we were building (mostly related to performance-based payouts) was no longer needed.

It is not so cut and dry. Here are different scenarios: 1. Public companies - They are driven by the need to enhance "shareholder value" and stock prices. In case of stock market crash, they will go back to the drawing table, re-assess their spending and cut a lot of projects, anything they deem to be not "critical". It can range from a cutting edge project, for which they don't see a pay off real soon to mundane stuff like support. 2. Startups - There are not many out there which are consistently profitable. Some of them need influx of money to keep running. A crash will cause a severe cash crunch. 3. Private Companies - Some of them might have their customers/suppliers being affected a lot.

Unlike what people like to believe stock market crash is not only about stocks. It affects a lot of things. Major one of them being money supply. Many people rely on Overdrafts or current accounts, I am not sure if that is what they are called in US, to run businesses. After crash businesses are put in a lot of pressure to up keep their accounts and run near real time cash business, something which affects a lot of things.

An expensive stock market doesn't mean you should pull everything into cash to time a crash. But it does mean (1) you should expect lower average returns over the long term, so you should plan accordingly, and (2) you should diversify across asset classes (which you should do anyway), with a lower weighting to stocks.

The 10 year US bonds haven't had such low rates and for such a long time at least since 1962 (as far back as the Yahoo Finance data goes). Inflation is low. Your belief in the valuation should be linked to how you feel about rates and inflation. If rates stay this low for a very extended period than the valuation might be on the low side. At any rate, these are unchartered territories in terms of investment returns and valuations.

EDIT: even going back to 1912 the 10 year rates are unusually low for an extended period. The closest historic period is during the 1940's valuations back then (P/E ratios) were lower (peaking around 1946).

(US Loan) interest rates (which are related to bond prices) are around the lowest they have been in recorded history (~5000 years): https://www.businessinsider.com.au/chart-5000-years-of-inter...

This article felt more like an ad for active money management (and ignoring index funds) than anything else.

Which makes sense. It's driving active managers nuts the techtonic shift to passive investing.

This was a good podcast on active vs passive investing: http://freakonomics.com/podcast/stupidest-money/

That and it's a classic case of trying to time the market, which is not something a savvy investor would do.

Yep, the opening claiming leaving your money in an index fund amounts to "speculation" seemed bizarrely backwards to me. So trying to pick winners and losers isn't speculation, it's investing, but investing in a balanced portfolio spreading risk over the long term is? The latter is only speculating that over the long term, there'll be more winners than losers in your portfolio. The former relies on making individualized bets correctly.

How many portfolio managers beat long term returns to the S&P 500? Not many that I've seen.

That's not what they claim though. They claim that significant exposure to US stocks, especially via indexes, right _at this moment_ looks risky since the entire US market is overheated and it requires an active investor to find any reasonable deals, if there are any left.

At the same time, they could be both wrong about overheated part, and lobbying to get some active investing fees, sure, but if you do take the viewpoint of the currently overpriced market, then the speculation claim doesn't seem too bizarre.

if only active investing by big money managers actually performed better than passive investing

If the entire US market is overheated because too much capital is chasing too few investment opportunities, which is the likely cause, then trying to cram that money into an even smaller set of investments is obviously not going to help matters. It'll sure help line the pockets of the people running the active investment funds though.

The miscalculation that I believe economists are making is the massive shift in leverage between the laborers and the owners. Historically, the two were balanced to the point that creating greater economic growth would tip the scales in the laborers' favor, thus increasing wages and inflation. What's happening now is that, due to many factors including outsourcing, illegal immigration, lobbying(bribery), capital concentration, anti-union legislation, anti-small business legislation, and a lot more, the scales are tipped so far in big business's favor that monetary policy is having a limited effect.

I honestly don't know if this trend can be reversed without something major happening.

That sounds like a suggestion that something very bad has to happen.

Nothing _has_ to happen. Mass media makes propaganda much easier to spread, and I consider it very likely that nothing will happen and inequality will strengthen for a long time. My point is that the system seems to be stuck in a positive feedback loop where greater capital concentration strengthens the system that created capital concentration in the first place. _Something_ would need to facilitate the movement out of that loop, and historically events required to lower inequality(world war, civil war, lower-class uprisings) haven't been pleasant.

>(world war, civil war, lower-class uprisings)

You forgot plagues, not that those are more pleasant.

It almost always is.

>lobbying(bribery), capital concentration, anti-union legislation, anti-small business legislation

We've learned through the decades---and especially through the bailouts in the late 2000s---that slapping big business on the wrist is not enough to stop cronyism and government-enabled monopoly. The only way to eliminate that is to cut the snake off at its head; if there is no power to dole out, lobbying wouldn't exist.

If the government can't choose who succeeds and who fails, then only those who provide value can succeed. The only way to grow a business without a monopoly is to employ people (whether directly, or indirectly by investing capital).

This statement is a bit nonsensical, because most lobbying has to do with encouraging the creation of laws that are favorable to a business and unfavorable to a businesses competitors.

Your statement; > if there is no power to dole out, lobbying wouldn't exist.

Implies that the government is picking the winner, when in fact they are writing and passing a law or regulation/deregulation. Any of these actions have effects that favor one group over another.

In order to have "no power to dole out" the government would need to not pass ANY laws, which isn't possible as that is critical to a governments function.

So it's a paradox. A government cannot function without the process of creating laws and all laws will inevitably favor one party or another no matter the effort to avoid such an outcome.

businesses also lobby against anti-labor laws like 'right to work' and other measures to prevent organization

There is obviously a gradient of how impactful laws are on businesses.

Federally insuring speculative businesses directly affects who wins and who loses in an industry.

On the other hand, laws against fraud and bribery cannot negatively affect industries which provide value.

Regulation is fine, but only to the extent that it cannot pick winners and losers.

Assuming the market keep on growing over time as it has done for a very long time, all time highs aren't something spectacular or unusual in the stock market, in fact it occurs almost on a daily basis.

As an analogy; if you go to a grocery store, all the items on the shelves are at an all time high price, but no one is expecting the price of milk to drop drastically just because it's at an all time high.

The price of milk is not generally subject to speculative bubbles, though. When it is (let's say some kind of shortage rumor or disaster prep) the price indeed crashes after reaching absurd levels.

I wouldn't call where we are a speculative bubble. If you look at the P/E or dividend rates of stocks and compare that to other investments you'll see they are still favourable. So a decision to e.g. own MSFT stock that a higher dividend than you'd get in a 10 year bond, while not without risk, isn't pure speculation. MSFT has a business with good prospects and it makes money and pays it back to you. Where else do you put your money?

That's not a good analogy. When they say S&P 500 stocks are "expensive" than before, that doesn't mean (just) expensive in absolute terms. It's expensive in terms of price/earnings ratio and such metrics.

The story is still suspicious for other reasons: what jedberg said.

And yet, inflation is said to be low. I'm not sure it is.

There are multiple, valid definitions of inflation, thus it can be low and high at the same time.

The Treasury Rate and CPI could both be low while real estate or precious metal prices explode. Likewise, real estate prices could be in a freefall while the CPI hits double digits.

This is wrong. Inflation doesn't measure the price of goods, it measures the price of money.

"Inflation always and everywhere a monetary phenomenon." -Milton Friedman

At the market level, stock returns only come from 4 things: dividend yield, real earnings growth, inflation, P/E expansion/contraction.

Looking at 10yr+ returns, the dividends and real earnings growth are likely to be relatively stable. The big wild card is P/E expansion/contraction. Dividend yield + real earnings growth gives us a baseline real return of around 3.6%.

A 30% PE contraction over the next 10 years would bring that return down to 0% and would still leave the PE at historically high levels. A return to historical valuation levels would mean a negative return in the neighbourhood of -3% annually.

Of course, it is also possible for PE to expand another 30% over the next decade causing stocks to deliver great returns.

Which scenario the world follows is more due to sentiment than economic performance which is why it is not predictable. Although there is certainly a probability bias towards the downside

With that said, valuation levels tell you a tremendous amount about risk levels, which are VERY high right now. Which might inform you to lower your stock exposure if you can't handle a large drop in pricing (either due to not being able to sleep at night or the effect it would have on your lifestyle).

I think PE has failed as a marker because there's too much capital chasing too few investments so of course PEs will be astronomical. High PEs don't mean what people think they mean or once meant.

Some dude with a blog predicts an impending stock-market crash. Well, Robert Shiller, the Nobel Prize laureate, has been predicting a stock-market crash since what, 2016? And the market kept on rising. This is not to imply that a crash or a long period of low returns is not coming, just that the opinions of financial pundits are just that.

It's the same news cycle over and over:

https://trends.google.com/trends/explore?date=today%205-y&q=...

Doomsday predctions have always been good at generating ad revenue for publishers.

Sure, but recessions and depressions are not something that is really all that rare. Unlike doomsday predictions, if you predict a crash you'll probably be right within a decade at least by pure chance alone.

Has he? I've always read him as being quite measured, saying that his index (10 year average) was not good at predicting near term returns. There are plenty of perma-bears, though. Although, in my opinion, being wrong on timing by years is still being wrong.

Robert Shiller, the Nobel Prize laureate

Shiller is an economist not an investor, in 2008 he kept saying that it will take a long time for the markets to recover, even telling it to the famous investors who were invited as guests in the class, the market went up next year.

Did he say that before or after the US gov bailed out Wall Street?

After the bailouts.

Even if there is a global downturn, the US economy will remain strong. Where else is capital going to go? If developing economies go bust, developed nations like the US will buy up their assets in a fire-sale.

China just opened up outside investment this week. Chinese capital already owns way more of America through various investment vehicles than we are willing to admit.

We abdicated our global leadership to China the day Trump was elected. Our economic leadership will likely follow in the next decade.

China's economy is highly dependent on Western consumption of their goods. If the US went into recession, and Americans significantly cut back on their consumption, which many of them certainly could afford to without going into poverty, wouldn't that wreck China's economy?

>China's economy is highly dependent on Western consumption of their goods. If the US went into recession, and Americans significantly cut back on their consumption, which many of them certainly could afford to without going into poverty, wouldn't that wreck China's economy?

No, they will manipulate their currency or adjust prices so that more people from China and India buy that stuff. Adding a few hundred million consumers will not be that difficult with those measures.

The Fed manipulates US currency too. We just don't call it "currency manipulation" because, conveniently, the definition of currency manipulation is buying foreign currency. Buying up your own currency/bonds or increasing reserve requirements achieves the same result.

Nixon's visit to china was motivated by a need to finance the war machine. Reagan didnt do anything to prevent waves of economic refugees from coming to the US after the economic hitmen took out Mexico's economy. Clinton picked up the free trade baton from Bush 41, passed it off to Bush 43, who passed it off to Obama.

Hopefully el presidente can find a way to stop the bleeding of thousands of economic paper cuts.

I don't know if that's quite right. From what I understood, one large cause in the inflation of US stocks has been from the inflow of foreign capital. Much of that capital is essentially a blind investment into ETF's.. I forget the numbers, something like 8% of total NYSE value and 30% of all trade volume. Those investments are essentially saying, "I don't really care what you do as long as you're doing it in US Dollars". They are certainly not investments evaluating the financials of specific companies.

That is a problem for the US and the World alike. A down-turn in the US economy which affected stock prices would cascade and cause an evaporation of money world wide overnight.

Developing countries are the least hurt by global recessions. And the point isn't that the capital has to go somewhere, it's that it's not actually there to begin with. Besides, the article says it's the US specifically that looks like it's in trouble and that foreign stocks looks much better.

Investment in developing countries is considered to be more risky. In a recession people move their money into less risky assets. I believe a major recession is coming, but I think the US will be the least hurt.

Between monetary policies from the Fed that have increased the base money supply by a factor of >5 since 2008 [1], and sustained trade imbalances on the order of tens of billions per month [2], it should not be surprising that stock prices are at records highs.

There is just so much more money around that has to be invested but cannot be used; the recent high in the stock market is not just based on the business cycle and traditional productivity/population growth.

If this is your take on the stock market's dramatic rise beyond 2008, then investing further in stocks and indexes may still be the thing to do even if it feel we're getting ripped off on the price.

1. https://fred.stlouisfed.org/series/WALCL 2. https://fred.stlouisfed.org/series/BOPGSTB

So don't try to time the market.

Except this time.

1. sell 2. wait 2 years (or less) 3. profit (buy back)

Don't time it but do value it. Given the low expected returns from the current levels you might look for something else with better ones. Thought I'm not sure what exactly.

Or just diversify and wait. The returns will find you.

We are long overdue for a correction. Put your money into bonds and buy into the fire sales in inevitable upcoming crash.

Bonds may not be a safe haven

Cash?

Bitcoin?

It's also bubbling up nicely, and one good crash deserves another.

Real estate.

This is the wrong thing to do. Don't try to time the market. Here's some reading for anyone that wants to understand the basics and learn how to avoid investing emotionally:

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_...

Pay close attention to the "Diversify", and "Never try to time the market" sections.

Bogleheads are always thinking in a tight set of assumptions that may not be meaningful to you. There's also an assumption that you aren't capable of meaningful analysis.

If I'm following boglehead dogma, I have at least my age in fixed income and cash. When you see a market crash or correction, it's wise to stick your head up and look around. In 2009 was it smarter to buy good companies driven down in price due to the financial panic?

I would argue yes. When you can buy a quality equity at a firesale price, it's a better investment than BND.

If you stick to your target allocation and rebalance as needed, you'd be doing just that.

Bonds are like the biggest bubble! With interest rates being so low they have almost nowhere to go but up in interest meaning today's bonds will lose incrediable amounts of value.

If you're going to buy bonds the should be rather short term and at today's interest rates and low inflation you could also hold cash.

For that reason I'm mainly in stocks with a some bonds and cash.

"They have almost nowhere to go but up" has been being said by people for many years now when it comes to interest rates. It's a leading statement that somehow implies that rates are destined to go up because they are so low.

This isn't true. They have a few places they could go. They could go up. They could go down (ZIRP is a thing.) Or they could do what they've been stubbornly doing for a long time now, wobble around basically within the same range.

Interest rates can technically go down even from close to zero levels, i.e. negative interest rates is a thing.

Personally I would prefer a diversified portfolio of stocks whose value haven't displayed correlation with previous market corrections.

“Stock prices have reached what looks like a permanently high plateau.”

Yale economist Irving Fisher, 1929

Anytime a story or study like this comes out I can always visit the HN comment section to find armchair economists pooh-poohing it. It's like clockwork.

It's a blog on marketwatch. not exactly hard-hitting research

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