I agree that valuations are high.
If we simply look at what the data says since at least 2008, we can say the following.
S&P 500 and Nasdaq 100 indexes have outperformed USD returns in developed and emerging market indexes for a long time (of course one should be able to find individual companies or maybe narrow sector or country indexes that might have done better than the US).
I’ve done a small amount of EWJ (Japan) and EWZ (Brazil) this year, selling puts and covered calls:
Valuations have been trending higher across US assets at least since 2008, and even across some instruments that many do not consider to be assets, such as gold and bitcoin.
Excessive asset valuations say to me that there is an excess of capital relative to the most productive uses of capital. Such an excess will lead to asset prices being bid up.
In the US, we see it in stocks (eg, AI stocks), bonds, real estate as well as alternatives such as gold and bitcoin. Private equity is running out of stuff to buy: physicians groups, hvac/plumbers/electrical businesses, single-family homes, probably many other things.
So, my main points are:
USD index returns have been better, for a long time, than many main international index returns (eg, EFA, EEM, many others).
Why wouldn’t this continue?
What’s the specific event(s) to change it?
I think one can easily argue that most other economies and business climates (and investment outlook) are worse off than the US, many very much so (debt, demographics, over-investment, wealth inequality).
Asset valuations have trended higher for a long time. Central banks, such as the US, lowering policy rates will only work to increase valuations.
Why wouldn’t this continue?
What’s the specific event(s) to change it?
As long as tax and regulatory environments favor the investing class (and increasingly favors capital over labor), I have a difficult time seeing major changes to the above (doesn’t mean it can’t change).
Will excess gov spending per se be the catalyst for a change?
We can say it has not so far, at least in the US. If gov spending flows into the economy and an exorbitant share of that benefit flows to the investing class, and they in turn continue to buy Treasurys (and other assets), why can’t this just continue? Like it has continued?
I’m not saying that it can’t blow up.
I’m just saying it has continued in recent history and an argument can be made that it further continues, just like it has been continuing.
What to do?
A standard financial advisor response would be “stay diversified within your desired asset allocation.” This would mean some level of international stock and bonds plus alternatives.
Berkshire Hathaway says hold a bunch of Treasurys while waiting for valuations to improve (they have been waiting for some time, no? and their returns are not very different from the S&P 500 for some time now, there is perhaps a tax benefit with no dividends paid so investors have more control over tax consequences).