American stocks are at their most expensive in decades | Hacker News Reader

American stocks are at their most expensive in decades

economist.com

49 pointsxqcgrek2104 comments

> And on that measure, shares now look more expensive—and thus lower-yielding—when compared with bonds than they have in decades.

If one is optimistic about the private sector driving wealth creation (rather than the government), then one's view is likely that shares will still be higher-yielding on a risk-adjusted basis. Of course, other factors like time horizon and one's personal risk appetite also matter.

If, however, one is not bullish on the long-term wealth creation of American companies (and by extensions the stock market), then the question becomes where would you rather put your money? Personally, I have a hard time seeing better alternatives for the average individual.

In other words: TINA.

Perhaps. But maybe I (and others) are just not researching enough.

Bonds yield higher returns now than the S&P500. Claiming that there is no alternative is financial illiteracy.

I suspect most folks simply don’t know how to buy different kind of bonds and resort to buying bond funds or ETFs etc.

> Bonds yield higher returns now than the S&P500. Claiming that there is no alternative is financial illiteracy.

For the record, I don't think I claimed there is no alternative.

While bond yield might be higher right this instant (or for the last 6 months, say), does not automatically mean your risk-adjusted return over 20 years is likely to be higher (historically shares have outpaced bonds by a fair margin).

Which makes me wonder where you are putting your money and consequently whether:

(a) you would advise putting one's investment money into bonds

and

(b) at what point would you advise to switch

and

Sorry I signed an NDA with my time travel provider. Just wait six months, you'll figure it out.

You might have said this in jest, but I think it is a strong argument against the possibility of time travel into the past.

efficient market hypothesis. No time travel because all valuable information has already been sent back through time.

The answer from financial theory is that you should be buying the market portfolio that includes stocks and bonds (and other assets) in the same proportion as their market capitalisation.

Looks at my return rates of ~8-9% on S&P 500

Excuse me, what bonds are returning that?

Is that an inflation-adjusted return? Just curious, same thing applies whether you're comparing nominal return or real return, I just know there are "inflation-protected" bonds.

And what are those inflation protected bonds returning?

1.4% in TIPS auction from today.

The Fed buys TIPS to suppress the yield (inflation expectations).

I know, that should be illegal, but when does that ever stop them.

Managing inflation expectations is the Feds main job.

And what are the inflation adjusted returns of Stocks over the last year or two?

3%. Still higher than inflation protected bonds.

How'd you figure?

Looking at the S&P 500[1] over the past two years relative to today's close:

  Aug 15, 2023 Close = $4,437.86
  Aug 15, 2022 Close = $4,297.14
  Aug 13, 2021 Close = $4,468.00
         1-yr Return = +3.3%
         2-yr Return = -0.7%

...and using the latest CPI-U data[2] over roughly the same period:

      Jul 2023 Index = 305.691
      Jul 2022 Index = 296.276
      Jul 2021 Index = 273.003
      1-yr Inflation = +3.2%
      2-yr Inflation = +12.0%

...I get real returns of +0.1% and -12.7% over 1- and 2-yr periods, respectively.

Same exercise looking at Vanguard VTI ETF[3]:

  Aug 15, 2023 Close = $220.37
  Aug 15, 2022 Close = $215.78
  Aug 13, 2021 Close = $230.05
         1-yr Return = +2.1%
         2-yr Return = -4.2%

...I get real returns of -1.1% and -16.2% over 1- and 2-yr periods, respectively.

[1] https://fred.stlouisfed.org/series/SP500

[2] https://fred.stlouisfed.org/series/CPIAUCNS

[3] https://advisors.vanguard.com/investments/products/vti/vangu...

A single coca-cola corporate bond was issued with an initial yield of 7.35%

https://cbonds.com/bonds/100441/

Current META bonds yield ~5.8%

Barclays bond at ~10%

https://www.bondsupermart.com/bsm/bond-factsheet/US06738EBX2...

You are comparing the S&P 500 to a single company bond? Should I also compare the return of a SpaceX stock to the S&P 500?

you can build a portfolio of bonds that satisfy your risk preference and target yield. bonds can also be leveraged a lot which is how they are the largest financial market in the world trumping stocks by few orders of magnitude.

a return of 8-9% on broad market index like SPX in a year when the market made 20% profit tells me you're very risk averse.

(Stupid question) how does someone, who is not risk averse, go about executing the strategy you’re advocating for?

Are Barclays bonds available for purchase via a consumer brokerage account?

You can browse bonds in Schwab and interactive Brokers for example.

Fwiw I am not saying to go and buy Barclays bonds, but merely exposing the fact that a market far larger than the stock market exists.

Edit: one thing worth pointing out is that there are also municipal bonds which are tax free if you live in the jurisdiction of the issuer.

https://www.municipalbonds.com/bonds/issue/79771PU86/

Here’s an example of the SF muni bond at 8.4% coupon currently yielding ~6%

That 7.375% on the Coca-cola bond looks like the coupon (approximate yield) from its initial issue, which appears to be in 1993. ("Ticker: KO 7.375 07/29/93") The yield-to-maturity (yield calculated from current market price) is likely to be lower. Coca-Cola is A-rated[1], and Schwab is showing A-rated corporate bonds as yielding 5% (3-month) to 6.4% (30 years)

[1] https://www.fitchratings.com/entity/the-coca-cola-company-80...

Yea that is correct. There are tons of other bonds at varying yields and default risks. Check out Apple and Tesla bonds for comparison for example.

None of which are yielding in the Coca-Cola ballpark without significant default risk. The broader point about bonds clearly beating S&P earnings is dubious.

Apple bobs yield just ~0.9% or so kore than 10 year treasuries. You have to go for much riskier companies to get significantly above 5%.

Of course if there is a recession, the stock market tanks and most importantly the Fed starts cutting rates you might do quite well (assuming you’re willing to sell those bonds afterwards).

How much are you missing out by buying bond funds? Why would there be much of a difference?

management fees plus the fact that a fund has a single risk utility function applied across the pool of all investors in the fund, where the investor's wealth is absent from the state variable. the investing math is different if current wealth is taken into account or not.

Aside from management fees I don’t grasp the concept your articulating (and I have a feeling I’m not the only one). Can you dumb it down even more?

https://arxiv.org/pdf/1405.0585.pdf

Bonds don’t out perform stocks over the long term. Buying bonds makes sense for risk averse people seeking fixed income with tax advantages, or speculators planning for a drop in interest rates. There may be a few 20 year periods where the stock market itself was flat, but anyone who had been buying during that whole time would have seen positive returns.

Also significant inflation = higher stock prices, while your principal would only decrease in value if you buy bonds.

I've always thought that inflation causes stocks to suffer, for a couple reasons. One, higher interest rates on government bonds means risk free interest rates can approach, or even exceed, the typical expected return for the stock market. Second, inflation reduces consumption, which reduces profits.

Short term that might be the case. However longterm (as long as the economy continues growing) you would still expect nominal earnings and revenue to increase at least at the same pace.

Also it varies a lot by sector, consumer staples for instance have been doing quite well over the last year.

If you have double digits inflation and can’t/don’t want to buy foreign currency the stock market is probably the best place to be. Just look at Turkey:

https://tradingeconomics.com/turkey/stock-market

>I suspect most folks simply don’t know how to buy different kind of bonds and resort to buying bond funds or ETFs etc.

Have you ever actually used treasury direct to buy bonds? I cannot fault anyone for buying an ETF over using that horrible website.

bonds don't always mean sovereign bonds such as US treasury bonds. There are also corporate and municipal bonds.

I dunno, maybe I’m weird but I find treasury direct to be pretty functional. I’ll take it any day over the likes of Citibank.

They locked my account for "security reasons" and to unlock it you need to physically mail a 3 page form.

I only ever used it once.

lol same. You have to enter not one but like 5 different security questions now. It's insane. I had to call in and have them reset my password that way.

Can you give me one example of government wealth creation?

Here come the Free Market Fundamentalists...

I don't know, roads?

Compare https://fee.org/articles/russian-smugglers-renovate-road-neg...

Ah yes, I want my roads built by smugglers.

You people would rather die than commit heresy against the Church of Free Market.

Building private roads is (almost) illegal in most of the world, so you'll mostly see criminals do it.

Financing roads from tolls is fairly straightforward.

Financing by tolls, there's another excellent example of wealth creation by the government, thank you.

You're not sneering hard enough yet.

Private companies can levy tolls on their road just fine.

I haven't asked "name something that governments can do that private companies can't".

Why would you want to privatize something that is effectively a natural monopoly? How could consumers ever benefit from that over the longterm?

Exactly. That's another feature of the Free Market Fundamentalists - their analysis always stops short of asking any relevant questions.

Why would you nationalise something that's effectively a natural monopoly? How are consumers supposed to benefit from that?

Clearly the American government is failing at providing enough opportunity for smugglers.

You mean the Russian government?

Sure. The public highway systems.

Backing the dollar?

> Can you give me one example of government wealth creation?

I think that's the wrong question, and a loaded one at that. It is probably more objective to think about government's role in providing a stable foundation for the private sector to produce wealth. There are countless examples of that, such as a reliable and just regulatory framework within which to operate, negotating treaties for international trade, creating infrastructure that lead to incredible wealth creation (think the internet), to name just a tiny few.

Does a majority of the IC industry and the internet count?

If we wanted to do this properly, we would have to look at opportunity costs, and see what that money / resources could have done otherwise.

To give a related example: war often leads to innovation. In our current universe, the second world war lead to digital computers.

However, IBM (and others) were already hard at work improving their computing devices and would have landed at electronic, digital computers sooner or later, too. Without spending something like ~50% of world GDP nor killings tens of millions of people.

For another really egregious example: have a look at manned space exploration. Specifically the International Space Station. Google said its total costs were about 150 billion USD. Compare '20 Breakthroughs from 20 Years of Science aboard the International Space Station' https://www.nasa.gov/mission_pages/station/research/news/iss...

That least is pretty meagre. They even have to cite spending money by itself as a 'breakthrough'. Almost all of their 'breakthroughs' could have been done for cheaper with unmanned space flight (and most of them are useless and irrelevant anyway.)

They could have left those 150 billion USD with the taxpayer, and private industry would have surely used them better.

Space X is proving without any doubt that the space exploration can be done significantly cheaper by private company.

Yes. I didn't bring them up, because most of their customer base is still governments, and that would have muddied the argument.

(I think that (most of) space exploration should be left completely to the private sector, not just the execution, but also the financing.

Even if you think that the government should be involved in the sciences, manned space flight is pretty much a more expensive version of unmanned space flight.

It's useful as entertainment only, so far. Eg the moon landing was great entertainment, better than a Marvel movie. But also more expensive. I don't think the government should be involved in providing entertainment.

But in any case, after the moon landing, the amount of inspiration coming out of manned space flight has dropped dramatically.)

> space exploration should be left completely to the private sector, not just the execution,

If you’re fine with there being no space exploration whatsoever. Which is a reasonable view, it’s very expensive and highly unprofitable.

Why would a (rational) private corporation ever send a rover to mars or a drone to titan? It would be an absurd thing to do..

There's more to the private sector than profit seeking corporations. Basically, everything that's not the government 'lives' there: clubs, charities, churches, foundations, etc.

If there's enough will in the population to vote for spending tax payer money on space exploration, surely there's enough willingness to crowdfund the whole thing?

And if people only want space exploration if they can vote other people's money to finance it, but don't want to put their own money where their mouth is, I'm not sure that would be a ringing endorsement?

> If you’re fine with there being no space exploration whatsoever. Which is a reasonable view, it’s very expensive and highly unprofitable.

I like space exploration, but I wouldn't want to force other people to pay for my aberrant preferences.

Yeah, it’s a perfectly reasonable view. We just shouldn’t pretend that space exploration would still be a thing if governments couldn’t finance it (which your previous comment sort of implied)

Yes.

Manned space exploration would probably not have been (much of) a thing. At least not until much later when the technology has improved.

Unmanned space exploration would probably still have happened to some degree. SpaceX has a lot of private customers.

(And I'm much less against governments financing unmanned space exploration than against them financing manned space exploration. That's just such a money sink.)

Civilization.

At best, government and civilization is a chicken-and-egg relationship, where you could perhaps argue that anywhere civilization occurs, a government does as well. I doubt that's even provably true anyway.

But the idea that a government first forms and then bestows upon us the gift of civilization would be incorrect. I suppose you're being flippant since you didn't bother to justify that comment.

> that anywhere civilization occurs, a government does as well

This is because beyond a certain amount of complexity (e.g. on the path to civilization), you better have a government what orchestrates favorable outcomes.

One way to frame it might be a chicken/egg problem, as you say, but that just begs the question whether one can meaningfully exist without the other?

All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what has the Rom-- government ever done for us?

Many of those are private or quasigovernmental entities, to be fair.

And whenever gov allows private entities the service is better and cheaper.

Why do people always forget the government is made up of people and people create things.

Nukes to prevent future world wars.

The next one will be really devastating and maybe triggered by accident.

Accidents will cause less damage than intentional use of many.

There's almost no use of nuclear weapons against two nuclear armed countries that doesn't walk up the tit for tat escalation ladder. Perun did a video about this a while back and it's pretty terrifying.

> If, however, one is not bullish on the long-term wealth creation of American companies (and by extensions the stock market), then the question becomes where would you rather put your money? Personally, I have a hard time seeing better alternatives for the average individual.

There's a whole global economy out there.

Yes! Where specifically in the global economy are you more excited about than the US?

Taking a peak at https://www.avantisinvestors.com/avantis-investments/avantis... 28% of it is Japan.

https://www.economist.com/finance-and-economics/2023/04/13/a...

Japan's demographics are a horror show. As is most of asia's. Heck, as is most of europe's. About the only places with decent demographics are latin america and africa and they're going to face outsized problems with global warming.

Those problems are well known, so should already be priced in.

If they are not priced in, please feel to free to take up the appropriate short positions:

That will both turn a profit for you, and contribute to efficient prices for the rest of us.

No where specifically, that's the point. It's about diversification.

On a domestic level, that's why you buy the S&P500, not YOLO everything on Tesla. Even if there's no other stock that 'you are more excited about than [Tesla]'.

> There's a whole global economy out there.

Of course yes, but the article is about the American stock market. Even if it weren't, which other economies or stock markets do you recommend one invests in? I have in the past invested in Emerging and Euro markets, but they disappointment me tremendously.

It is also worth noting that American companies account for 25% of global GDP, which means investing in the American stock market (say the S&P 500) is an easy way to get broad exposure.

Note: I'm not saying the American stock market is the pinnacle of wealth creation, just that it has been the more obvious place to put one's money (if you have access to it).

> Even if it weren't, which other economies or stock markets do you recommend one invests in?

All of them. You can use something like VWRA.

The idea is not so much to increase your absolute returns, but to diversify to decrease variance. (You could then load up on leverage to get back to the same risk levels as before, but with higher returns.)

> It is also worth noting that American companies account for 25% of global GDP, which means investing in the American stock market (say the S&P 500) is an easy way to get broad exposure.

In reverse, American companies also make up about 50% of global stock market capitalisation. So even investing in a global index fund like VWRA still gives you quite a big exposure to the US.

Sure, but where are you going to find the combination of trust as well as the momentum of powerful interests combined upside risk appetite?

There will be some other winners out there for sure, but how do you pick 'em? And even if you fully believe America has peaked and is now in structural decline, where do you place your long-term bets? The markets can stay irrational longer than you can stay solvent, as the saying goes.

It also is not quite obvious which stock market is better. The Chinese economy has been strong but generally that has not reflected in the major indexes (Shanghai Composite, Hang Seng) and they whipsaw a lot.

If you could only invest in one country's stock market, investing in the US is perhaps best.

But you (most likely) don't have that restriction. Just buy a global index fund and benefit from diversification. No need to try to figure out which stock market (if any) is best.

> The Chinese economy has been strong but generally that has not reflected in the major indexes (Shanghai Composite, Hang Seng) and they whipsaw a lot.

That insight goes in the other direction as well: just because some country's eg demographics might be bad, doesn't mean her stock market is necessarily a bad bet. The demographic challenges might already be priced in.

> There will be some other winners out there for sure, but how do you pick 'em?

You don't. You buy a global index fund.

> And even if you fully believe America has peaked and is now in structural decline, where do you place your long-term bets?

I have no definite opinions on the subject. I assume everything some armchair investor like me (or probably you) knows, is already priced in three times over.

https://archive.is/x5fZU

2023 "journalism": hey guyz the stockmarket looks like its at pretty high levels did you see that?

This style of reporting has existed for decades

I started investing in '08. I've always been a pretty staunch boglehead, and I've always held 'age in bonds' which is pretty conservative. Most of my bonds were in the TSP G fund (zero risk, 10y treasury yields) with a little in short term bonds.

Seeing how badly even short term bonds have gotten slaughtered in this downturn has made me pretty jaded. They'll have a much smaller role in my asset allocation going forward. Probably no more than 30% of my portfolio even in retirement.

> Most of my bonds were in the TSP G fund (zero risk, 10y treasury yields) with a little in short term bonds.

You're clearly confused. The TSP G Fund[1] is comprised of 100% nonmarketable short-term Treasuries specially issued to the TSP; 10-year T-notes don't exist in its composition whatsoever. and its nominal return over any arbitrary period has never been negative...in other words, bond duration risk simply isn't applicable to the fund. Furthermore:

>> The G Fund rate is calculated by the U.S. Treasury as the weighted average yield of approximately 183 U.S. Treasury securities on the last day of the previous month.

[1] https://www.tsp.gov/funds-individual/g-fund/

>In practice, monthly returns have closely matched the percentage rate for the 10-year U.S. Treasury Note almost perfectly. The G Fund and 10-year are 98.4% correlated since 1988

https://www.govexec.com/pay-benefits/2023/05/tsp-g-fund-debt...

That's nice but entirely irrelevant.

If you were 100% allocated in TSP G Fund and Treasury yields spiked across the curve, your account balance never goes down and you could withdrawal the entire amount at any time without losing a single penny.

If you were 100% allocated in 10-yr T-notes and Treasury yields spiked across the curve, well...you'd be swallowing a substantial loss proportional to your unhedged duration exposure if you were either to liquidate your position before maturity or before yields normalize.

This[1] is what you don't understand.

[1] https://www.investopedia.com/terms/b/bond-yield.asp

Yeah, I do in fact understand the inverse relationship between yield and price. What I'm saying is that in practice it doesn't really matter with respect to the G fund. I don't know anywhere else one can get a risk free return equivalent to a 10y bond. This whole thing is a very odd, pedantic thing to argue. There's a reason why they make up most of the bond portion of my portfolio.

> I don't know anywhere else one can get a risk free return equivalent to a 10y bond.

How about equivalent risk-free return, even better yield, upside potential, optionality...and you don't need to be a federal employee to play?

It's been hiding in plain sight[1][2] for over a year now, but I'm not a financial advisor and certainly not your financial advisor...just an interwebs rando with a hobby positing food for critical thought.

[1] https://fred.stlouisfed.org/graph/?g=17THg

[2] https://fred.stlouisfed.org/graph/?g=17THh

> They'll have a much smaller role in my asset allocation going forward.

If you would ever consider bonds wouldn’t now be one of the best time ever to buy them? (unless you believe interest rates could sill go up significantly)

I might consider barbelling my gfund with some 30y treasuries, but I now think ageInBonds is bunk. I don't think they provide nearly the diversification benefit they used to. If a friend asked me for asset allocation advice, I would not recommend they have more than 20-30% in bonds.

The metric to measure how expensive equity is sounds flawed. Expected earnings divided by share price is not indicative of actual equity returns - especially over 1 year?

The Fed's balance sheet is still 2X bigger than it was pre-pandemic. The money has to go somewhere.

https://fred.stlouisfed.org/series/WALCL

If equities are currently highly valued, should we expect IPOs to come back?

pendulum swings. hang on to your hats ladies and gentlemen

Not for long!!!!!

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