US Equities - overvalued?

[GeoffF100]

And they add to the bubble by putting a large percentage into the most expensive stocks as they allocate by cap weighting.

A global market weighted tracker does not add it the bubble. It just leaves the bubble undisturbed.

[GeoffF100]

You (and Vanguard) say the US is overvalued and its bubble. The market (people) disagree and they keep buying it. Who is right?

Both of them perhaps.

[Lootman]

And they add to the bubble by putting a large percentage into the most expensive stocks as they allocate by cap weighting.

A global market weighted tracker does not add it the bubble. It just leaves the bubble undisturbed.

Ohno was being mischievous there as he was conflating "most expensive" with "largest market cap".

Apple is nearly $3 trillion in market cap, but by various measures such as P/E ratio it is not particularly expensive, especially given its growth rate, balance sheet, cashflow generation and so on. After all Buffett has a huge slug invested in it and he isn't known for buying over-priced shares.

Whether we are in a bubble is not something that can be known at the time, but only in retrospect IF the market comes crashing down.

[BT63]

Whether we are in a bubble is not something that can be known at the time, but only in retrospect IF the market comes crashing down.

I think we are in an 'everything bubble', pumped up by very low interest rates and QE which have both been allowed to unnecessarily continue for years after the 'emergency' which spawned them has passed.

By historic measures, US shares have usually given poor long term real returns from these kind of valuations.
But this time it's different because central banks have been interfering to such an extent that bonds guarantee negative real returns.

At some point there will be a come down but it could be many years away. However, when it happens it will probably wipe out half a century of real returns.
My data shows that in 1982, after the 1970s stagflation, the value of the US stock market had gained virtually nothing in real terms compared to where it was at the turn of that century.

[BullDog]

Whether we are in a bubble is not something that can be known at the time, but only in retrospect IF the market comes crashing down.

I think we are in an 'everything bubble', pumped up by very low interest rates and QE which have both been allowed to unnecessarily continue for years after the 'emergency' which spawned them has passed.

By historic measures, US shares have usually given poor long term real returns from these kind of valuations.
But this time it's different because central banks have been interfering to such an extent that bonds guarantee negative real returns.

At some point there will be a come down but it could be many years away. However, when it happens it will probably wipe out half a century of real returns.
My data shows that in 1982, after the 1970s stagflation, the value of the US stock market had gained virtually nothing in real terms compared to where it was at the turn of that century.

But this time it's different - The most expensive words in investment, probably.

[BT63]

But this time it's different - The most expensive words in investment, probably.

Well, it is different because central banks have removed the opportunity to earn a real return from bonds whilst flooding the system with never-seen-before quantities of money. US money supply (Fed balance sheet) has more than doubled in the last two years.

Negative real interest rates make even poor quality companies look reasonably attractive, pushing up the valuation of anything that has even the smallest chance of giving a real return.

So here we are today with the US stockmarket at valuations which would normally be considered 'bubble', underpinned only by the lack of return on anything else due to asset purchases/QE pushing bond yields negative and near-zero interest rates.

The Fed is talking tough. They will be stopping the floods of money, to which the S&P500 has a very high correlation. They might even start quantitative tightening (reducing money supply), which, if the correlation with S&P continues, will push the S&P down.
To add to that, bond yields are rising, making bonds a little less unattractive, while the Fed also promises a few interest rate rises, making cash a little less unattractive.

To me, the combination seem like strong headwinds for the US stock markets.

[BullDog]

But this time it's different - The most expensive words in investment, probably.

Well, it is different because central banks have removed the opportunity to earn a real return from bonds whilst flooding the system with never-seen-before quantities of money. US money supply (Fed balance sheet) has more than doubled in the last two years.

Negative real interest rates make even poor quality companies look reasonably attractive, pushing up the valuation of anything that has even the smallest chance of giving a real return.

So here we are today with the US stockmarket at valuations which would normally be considered 'bubble', underpinned only by the lack of return on anything else due to asset purchases/QE pushing bond yields negative and near-zero interest rates.

The Fed is talking tough. They will be stopping the floods of money, to which the S&P500 has a very high correlation. They might even start quantitative tightening (reducing money supply), which, if the correlation with S&P continues, will push the S&P down.
To add to that, bond yields are rising, making bonds a little less unattractive, while the Fed also promises a few interest rate rises, making cash a little less unattractive.

To me, the combination seem like strong headwinds for the US stock markets.

It's not easy to disagree. The markets are capable of staying irrational for longer than I can stay solvent, perhaps.

[BT63]

It's not easy to disagree. The markets are capable of staying irrational for longer than I can stay solvent, perhaps.

Yes, the US could stay irrational for longer than you or I can remain solvent if we bet against them, but we can hold shares in other markets while avoiding the US.
The US looks stretched by historical valuation measures but the UK still looks about fairly priced, so I am very overweight the UK. I am also very overweight precious metals investments.

[BT63]

I've been flicking through old data.

Since the 2008 financial crisis, pumped up by the Fed's ZIRP and massive QE, the US stock market's runaway bull has outperformed other markets by much more, and for much longer, than any other period in the last 50 years.

So I'm going to suggest that US equities look well placed to soon begin one of their worst periods of underperformance in living memory.

[TUK020]

I've been flicking through old data.

Since the 2008 financial crisis, pumped up by the Fed's ZIRP and massive QE, the US stock market's runaway bull has outperformed other markets by much more, and for much longer, than any other period in the last 50 years.

So I'm going to suggest that US equities look well placed to soon begin one of their worst periods of underperformance in living memory.

There is a good chance that this is the case.
However, much of that outperformance has been driven by a handful of tech companies that dominate their markets, and are continuing to earn significant profits.
This will only change when some meaningful antitrust action is taken, or some new innovation unseats them. When do you think that will happen?

[simoan]

I've been flicking through old data.

Since the 2008 financial crisis, pumped up by the Fed's ZIRP and massive QE, the US stock market's runaway bull has outperformed other markets by much more, and for much longer, than any other period in the last 50 years.

So I'm going to suggest that US equities look well placed to soon begin one of their worst periods of underperformance in living memory.

That's great. If you can now just tell us how long that period will last and when it will start, that'd be a really big help for the rest of us. The first lesson of investing is to tell yourself every day that you do not know what the future holds and invest on that basis. It's far easier to admit you really have no idea, which is true isn't it?

All the best, Si

[bluedonkey]

I think I don't know the future and simultaneously think that BT63 is right.

[BT63]

I've been flicking through old data.

Since the 2008 financial crisis, pumped up by the Fed's ZIRP and massive QE, the US stock market's runaway bull has outperformed other markets by much more, and for much longer, than any other period in the last 50 years.

So I'm going to suggest that US equities look well placed to soon begin one of their worst periods of underperformance in living memory.

There is a good chance that this is the case.
However, much of that outperformance has been driven by a handful of tech companies that dominate their markets, and are continuing to earn significant profits.
This will only change when some meaningful antitrust action is taken, or some new innovation unseats them. When do you think that will happen?

The second largest and second longest period of outperformance of the US market was the 1995 -2000 bull market which ended with a tech mania and subsequent 50% decline in the major indices (worse for tech shares).

[simoan]

I think I don't know the future and simultaneously think that BT63 is right.

Sorry, but I know you don't know!! You shouldn't need to "think" about it. It's a rookie error to think you know anything about the future unless you're Mystic Meg.

[BT63]

That's great. If you can now just tell us how long that period will be and when it will start

I suspect it will last for several years and will start within a few months if it hasn't already begun. I think the Fed's proposed tightening cycle will trigger it.

[simoan]

That's great. If you can now just tell us how long that period will be and when it will start

I suspect it will last for several years and will start within a few months if it hasn't already begun. I think the Fed's proposed tightening cycle will trigger it.

Thanks for that. I'll sell everything this PM then

[BT63]

The first lesson of investing is to tell yourself every day that you do not know what the future holds and invest on that basis.

Just looking at the historic probabilities gives a good idea.
The US market is expensive on historic measures and is only supported by never-seen-before levels of monetary stimulus in the form of QE, zero interest rates and the deprivation of returns on other asset classes which has bent the whole system badly out of shape.

This has caused the largest and longest outperformance in at least the last several decades but it is not underpinned by sound economics or fundamentals. Since the financial crisis of 2008, the increase in the S&P 500 has almost entirely matched increases in the Fed's balance sheet via QE.

Didn't they used to say: 'Don't fight the Fed'? The Fed is making strong noises about tightening which will be bad news for the pumped up US stock market and US consumer spending which is highly correlated with it.

Additionally, the US markets' valuations relative to other nations' major indices are 3std dev from the mean relative to the last few decades. Yes, I appreciate the US usually trades at a small valuation premium to the rest of the world of around 10%, but it's now at about 35% premium.

The odds don't look good for the US continuing to outperform.

[simoan]

The first lesson of investing is to tell yourself every day that you do not know what the future holds and invest on that basis.

Just looking at the historic probabilities gives a good idea.
The US market is expensive on historic measures and is only supported by never-seen-before levels of monetary stimulus in the form of QE, zero interest rates and the deprivation of returns on other asset classes which has bent the whole system badly out of shape.

This has caused the largest and longest outperformance in at least the last several decades but it is not underpinned by sound economics or fundamentals. Since the financial crisis of 2008, the increase in the S&P 500 has almost entirely matched increases in the Fed's balance sheet via QE.

Didn't they used to say: 'Don't fight the Fed'? The Fed is making strong noises about tightening which will be bad news for the pumped up US stock market and US consumer spending which is highly correlated with it.

Additionally, the US markets' valuations relative to other nations' major indices are 3std dev from the mean relative to the last few decades. Yes, I appreciate the US usually trades at a small valuation premium to the rest of the world of around 10%, but it's now at about 35% premium.

The odds don't look good for the US continuing to outperform.

Sorry but I don't invest in markets, I invest in companies. All this hand waving crystal ball gazing nonsense is of no use to anyone. Buy good companies and ignore markets, currencies, macroeconomics etc. I don't invest in index trackers, so what's the point worrying about "the market"? I don't want to go over this again as the same discussion exists on a thread about Rotating to Value somewhere. If you think the S&P500 will fall without effecting the London markets, then you're living in dreamland. There will be no hiding place.

[BT63]

Thanks for that. I'll sell everything this PM then

There are other places to invest.
Just buy a mix of UK, EU, Japanese, Pacific trackers to build your own 'world ex-US' tracker fund. There is no need to have zero exposure to shares.

Also looking at the statistics, it looks like it shouldn't be long before growth investing has a bad run for several years while value investing has a good run (or at least a good run in relative terms).

Further statistics show that value shares are almost as cheap vs growth shares compared to the peak of the dotcom bubble. Value is the second-cheapest it has been in the last several decades.
Boring 'old economy' shares could well give a pleasant surprise, or at least less of a nasty surprise than growth.

[simoan]

Thanks for that. I'll sell everything this PM then

There are other places to invest.
Just buy a mix of UK, EU, Japanese, Pacific trackers to build your own 'world ex-US' tracker fund. There is no need to have zero exposure to shares.

Also looking at the statistics, it looks like it shouldn't be long before growth investing has a bad run for several years while value investing has a good run (or at least a good run in relative terms).

Further statistics show that value shares are almost as cheap vs growth shares compared to the peak of the dotcom bubble. Value is the second-cheapest it has been in the last several decades.
Boring 'old economy' shares could well give a pleasant surprise, or at least less of a nasty surprise than growth.

I don't want to go over this again and duplicate another thread. This differentiation between Growth and Value is a total bloody nonsense. Please read the Howard Marks newsletter I linked to on the other thread: https://www.oaktreecapital.com/docs/def ... -value.pdf

Also the latest annual newsletter from Terry Smith: https://www.fundsmith.co.uk/media/3wcng ... rs-web.pdf

I'd also acquaint yourself with how compounding works.