The Lemon Fool

The S&P 500 Shiller PE Ratio is now over 40. In the past 140 years this level of valuation has only been seen once before, and that was in the immediacy before the dotcom crash at the turn of the millennium.

Does any one have any views on this and taken a particular course of action with their holdings?

https://www.multpl.com/shiller-pe

Get (go) real

3.3 sigma ... in nominal terms, but just 1.5 sigma in real terms (real earnings / real price). Around 28 (1/PE of around 3.6%). And with rising inflation a recent downward trend (since December 2020's 39 level).

Remind me, how often in the last 140 years in the US has the rate of inflation been 7% and the interest rate below 1%?

Everything is relative and that applies to share prices also.

Shaker wrote:Does any one have any views on this and taken a particular course of action with their holdings?

Yes, I sold all my US exposure in the last few months and reinvested most of the proceeds into UK mid-caps and precious metals miners.

scrumpyjack wrote:Remind me, how often in the last 140 years in the US has the rate of inflation been 7% and the interest rate below 1%?

Another reason why I'm not keen on the US and another reason why I added to my precious metals investments recently. I might add more to my precious metals investments in coming weeks.

PE ratios are a combination of 2 contributors. Mostly the bears assume the adjustment is always driven by the P and ignore it is E that might change. The P, as determined by the market, reflects not just current E but future Es too. As such a high PE (one that could be considered extreme historically) would need checking against the predicted stream of those Es, not just the current one (which might be impacted by factors such as an historically unusual, economy affecting, pandemic, for instance).

I haven't analysed the US economy, or stockmarket either, at a macro or micro level for a long time, so have no real opinion on the current "extreme" valuation however.

dealtn wrote:PE ratios are a combination of 2 contributors. Mostly the bears assume the adjustment is always driven by the P and ignore it is E that might change. The P, as determined by the market, reflects not just current E but future Es too. As such a high PE (one that could be considered extreme historically) would need checking against the predicted stream of those Es, not just the current one (which might be impacted by factors such as an historically unusual, economy affecting, pandemic, for instance).

I haven't analysed the US economy, or stockmarket either, at a macro or micro level for a long time, so have no real opinion on the current "extreme" valuation however.

The P is high because the system is flooded with new money looking for a home and where alternatives offer low or negative returns.
P is also high because the floods of new money are being spent, increasing the E.

But now the floods of money are causing inflation, which could affect E if materials or wage costs rise.
Also the Fed are going to begin to think about possibly at some point maybe slightly reducing the floods of money and/or a few token gesture interest rates, possibly making shares look a little less attractive, and yield-paying assets a little less unattractive.
Also without floods of new money the stock market won't make significant progress and if it stalls out, yet inflation persists, people might start selling and investing in something else such as gold.

Shaker wrote:The S&P 500 Shiller PE Ratio is now over 40. In the past 140 years this level of valuation has only been seen once before, and that was in the immediacy before the dotcom crash at the turn of the millennium.

Does any one have any views on this and taken a particular course of action with their holdings?

The problem as always is that if you sell off your US equity exposure then where do you reinvest it?

Ageing Japan? Sclerotic Europe? Politically manipulated China? The UK struggling with various factors? Bonds that pay you almost nothing? Gold that pays no income and is getting its lunch eaten by crypto?

And where else do you find world-beating companies like Apple, MicroSoft, Google, Tesla etc?

So I remain about 50% invested in the US, which is still an under-weighting in market cap terms.

Lootman wrote:

Shaker wrote:The S&P 500 Shiller PE Ratio is now over 40. In the past 140 years this level of valuation has only been seen once before, and that was in the immediacy before the dotcom crash at the turn of the millennium.

Does any one have any views on this and taken a particular course of action with their holdings?

The problem as always is that if you sell off your US equity exposure then where do you reinvest it?

Ageing Japan? Sclerotic Europe? Politically manipulated China? The UK struggling with various factors? Bonds that pay you almost nothing? Gold that pays no income and is getting its lunch eaten by crypto?

And where else do you find world-beating companies like Apple, MicroSoft, Google, Tesla etc?

So I remain about 50% invested in the US, which is still an under-weighting in market cap terms.

Yes, and how many times have we heard this same argument for many years now? Eventually, like a stopped clock, it will be right but in the meantime people are missing out on some of the best returns by investing in some of the most profitable companies that have ever existed. Makes no sense to me!

All the best, Si

Wall Street is not the US economy. Wall Street is not Main Street. Around 30% of S&P 500 revenues come from outside the US.

Isn’t this board here to raise and discuss economic questions and issues?

As stated by others previously, the P in PE is driven by market sentiment. The E is driven by numerous factors including economic conditions, availability and cost of capital and prevailing tax rules.

Is there a question here around how the US economy is likely to fare? The OECD economic outlook published in December highlights that US GDP has recovered more quickly than GDP for Europe however employment recovery in the US is lagging. If GDP has recovered but less people are employed this suggests that productivity may have improved. Or put another way, similar revenues but with reduced employment costs (although salaries for those employed is inflating) leads to increased profitability.

Connecting economic facts and then working out how this translates through into company earnings is one challenge. Adding in how markets then price this in over time is quite another matter. PE is an interesting measure when considering investing choices however it isn’t a valuable indicator of the health or otherwise of an economy.

I found this infographic interesting:

https://advisor.visualcapitalist.com/wa ... e-economy/

Degsy

simoan wrote:

Lootman wrote:

Shaker wrote:The S&P 500 Shiller PE Ratio is now over 40. In the past 140 years this level of valuation has only been seen once before, and that was in the immediacy before the dotcom crash at the turn of the millennium.

Does any one have any views on this and taken a particular course of action with their holdings?

The problem as always is that if you sell off your US equity exposure then where do you reinvest it?

Ageing Japan? Sclerotic Europe? Politically manipulated China? The UK struggling with various factors? Bonds that pay you almost nothing? Gold that pays no income and is getting its lunch eaten by crypto?

And where else do you find world-beating companies like Apple, MicroSoft, Google, Tesla etc?

So I remain about 50% invested in the US, which is still an under-weighting in market cap terms.

Yes, and how many times have we heard this same argument for many years now? Eventually, like a stopped clock, it will be right but in the meantime people are missing out on some of the best returns by investing in some of the most profitable companies that have ever existed. Makes no sense to me!

A good example of being "right" but early (and therefore wrong) was Greenspan's infamous declaration that there was irrational exuberance in the US market. That claim was during a speech he made in December 2006 when the S&P 500 was around 730.

The market went up for 3.5 more years before he was proven "right", at which point the S&P 500 was at 1,450. It then went down with the dotcom crash, back to 825 or so, still above the level when Greenspan spoke.

It then climbed back to 1,500 or so, just in time for the financial crisis, which briefly took us back down to about the 700 level, or so.

All along the ride there were permabears, doomsters and gloomsters, and yet now we are at almost 4,800.

So were the bears right? Yes, in 2000 and 2008. Did they profit from being "right but early"? Not unless they were impeccable with their timing both in and out, twice.

Surely the lesson here is to stay invested and ride out the bumps.

Lootman wrote:Surely the lesson here is to stay invested and ride out the bumps.

I am staying invested, just not in assets which I think look very stretched and pumped up by excessive quantities of easy money when I can buy assets which look much less stretched (UK midcaps and precious metals miners).
However, I generally consider myself to be more towards the value and contrarian end of the spectrum.

Lootman wrote:

Shaker wrote:The S&P 500 Shiller PE Ratio is now over 40. In the past 140 years this level of valuation has only been seen once before, and that was in the immediacy before the dotcom crash at the turn of the millennium.

Does any one have any views on this and taken a particular course of action with their holdings?

The problem as always is that if you sell off your US equity exposure then where do you reinvest it?

Ageing Japan? Sclerotic Europe? Politically manipulated China? The UK struggling with various factors? Bonds that pay you almost nothing? Gold that pays no income and is getting its lunch eaten by crypto?

And where else do you find world-beating companies like Apple, MicroSoft, Google, Tesla etc?

So I remain about 50% invested in the US, which is still an under-weighting in market cap terms.

The UK struggling with brexit

Shaker wrote:Does any one have any views on this and taken a particular course of action with their holdings?

No.
Once you realise nobody knows anything about the future and trying to predict the market is a waste of time, you just drip feed money into global index funds.
You then don't worry about these things.

Lootman wrote:

Shaker wrote:The S&P 500 Shiller PE Ratio is now over 40. In the past 140 years this level of valuation has only been seen once before, and that was in the immediacy before the dotcom crash at the turn of the millennium.

Does any one have any views on this and taken a particular course of action with their holdings?

The problem as always is that if you sell off your US equity exposure then where do you reinvest it?

Ageing Japan? Sclerotic Europe? Politically manipulated China? The UK struggling with various factors? Bonds that pay you almost nothing? Gold that pays no income and is getting its lunch eaten by crypto?

And where else do you find world-beating companies like Apple, MicroSoft, Google, Tesla etc?

So I remain about 50% invested in the US, which is still an under-weighting in market cap terms.

Bingo.

Lootman wrote:

simoan wrote:

Lootman wrote:The problem as always is that if you sell off your US equity exposure then where do you reinvest it?

Ageing Japan? Sclerotic Europe? Politically manipulated China? The UK struggling with various factors? Bonds that pay you almost nothing? Gold that pays no income and is getting its lunch eaten by crypto?

And where else do you find world-beating companies like Apple, MicroSoft, Google, Tesla etc?

So I remain about 50% invested in the US, which is still an under-weighting in market cap terms.

Yes, and how many times have we heard this same argument for many years now? Eventually, like a stopped clock, it will be right but in the meantime people are missing out on some of the best returns by investing in some of the most profitable companies that have ever existed. Makes no sense to me!

A good example of being "right" but early (and therefore wrong) was Greenspan's infamous declaration that there was irrational exuberance in the US market. That claim was during a speech he made in December 2006 when the S&P 500 was around 730.

The market went up for 3.5 more years before he was proven "right", at which point the S&P 500 was at 1,450. It then went down with the dotcom crash, back to 825 or so, still above the level when Greenspan spoke.

It then climbed back to 1,500 or so, just in time for the financial crisis, which briefly took us back down to about the 700 level, or so.

All along the ride there were permabears, doomsters and gloomsters, and yet now we are at almost 4,800.

So were the bears right? Yes, in 2000 and 2008. Did they profit from being "right but early"? Not unless they were impeccable with their timing both in and out, twice.

Surely the lesson here is to stay invested and ride out the bumps.

Is the right answer.

Lootman wrote:A good example of being "right" but early (and therefore wrong) was Greenspan's infamous declaration that there was irrational exuberance in the US market. That claim was during a speech he made in December 2006 when the S&P 500 was around 730.

I think you meant 1996?

BJ

bungeejumper wrote:

Lootman wrote:A good example of being "right" but early (and therefore wrong) was Greenspan's infamous declaration that there was irrational exuberance in the US market. That claim was during a speech he made in December 2006 when the S&P 500 was around 730.

I think you meant 1996?

Yes I did, I mistyped, sorry.

absolutezero wrote:

Shaker wrote:Does any one have any views on this and taken a particular course of action with their holdings?

No.
Once you realise nobody knows anything about the future and trying to predict the market is a waste of time, you just drip feed money into global index funds.
You then don't worry about these things.

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

OhNoNotimAgain wrote:

absolutezero wrote:

Shaker wrote:Does any one have any views on this and taken a particular course of action with their holdings?

No.
Once you realise nobody knows anything about the future and trying to predict the market is a waste of time, you just drip feed money into global index funds.
You then don't worry about these things.

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

And to quote Keynes, "The market can remain irrational longer than you can remain solvent".

Vanguard put out a release a few weeks ago saying they think the US is overvalued. In the same release they also said it remained overvalued for years the last time they said such a thing.
If you pay any attention to the crystal balls then you would have lost out on a lot of growth.

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