Shiller Index Hits Red

A little uplifting reading to get the day started. Arends is a solid writer and generally not an alarmist. Anyone have thoughts on this?

Wall Street’s jump this week has taken the S&P 500 SPX, +1.32% to an eye-watering 27.9 times the corporate earnings of the past 10 years. That’s according to data compiled by Yale finance professor Robert Shiller and some simple math.

This is about the same level that the market hit just before the crash of 1929, and is far higher than was seen in 2007, for example, or during the ill-fated boom of the late 1960s. The last time we saw the stock market this expensive on this measure was early in 2002 — just before stocks plummeted.

http://www.marketwatch.com/story/the-stock-markets-oldest-in…

  • Khleb
4 Likes

Where else are investors going to put their money today?

Take a look at the US 10 Year note and the interest rate historically. During most of the years you discuss below, rates were at 4% plus. We are half that now with every country other than the US attempting to devalue their currency.

Where will investors go if not the market?

We are in an unprecedented period of time where historical references may bear little meaning.

AJ

10 Likes

Anyone have thoughts on this?

not good ones and avoiding political commentary, but maybe this is the conventional view (watch Cramer):

*corporate tax rates are going lower. If you make money and you pay taxes here in the US, your earnings are going to go higher - permanently higher - which means the E is going to go up, all things equal. For companies with a 40+% tax rate, this is going to be a big deal. The trailing earnings don’t capture this.

*a repat looks likely. So companies with significant overseas capital might get a tax holiday to bring that money home. This maybe won’t be as big a deal as the tax cut but it will at least boost the BS of those who have lots of overseas cash and will make it more likely there will be M&A here in the US.

*decreased regulation. Unraveling of Obamacare and in theory looser regulations across most industries will lead to some expense control and in some industries - banks - could lead to sharply higher earnings.

All this is risky of course - to get a rise in prices before you get a profit increase, but the trailing numbers don’t include any of this. Plus, 10 year treasuries are rising - at 2.4% now - and who knows where they go, so you’ll get some major offset eventually if they continue to move higher.

All in all, it makes me very confused…

just 2c

6 Likes

All in all, it makes me very confused…

To simplify:

1- Going from an anti-business policy to a pro-business policy can only be good for business.

2.- The market tends to be a discounting machine meaning that buying at today’s higher prices is not as good as holding at yesterday’s better prices. Good for investors, not so good for traders.

3- Take indicators with a grain of salt and concentrate on your specific assets. I’ve successfully ignored Shiller forever. :wink:

4- If the rise seems overdone, take some profits.

5- If the dip seems overdone, add some.

6- Buy only good companies.

7- Don’t bother to forecast, you’ll be wrong half the time. React to market moves.

Denny Schlesinger

28 Likes

Is the Shiller P/E too high? Sure it is.

Will it correct back to the historical average of 16? Yes it will.

Can we time it? No. It will take a ‘black swan’ event. Completely unpredictable.

What should you do about it? Nothing. Stay invested in stocks 100% of the time.

The S&P 600 Small Cap Index had averaged 10% annually since the spring of 2000. It sustained two crashes.

Anecdotally, I was alarmed by the Shiller P/E back in January 2013. It was 22 or so which is high. I ended up with portfolio gains of 50% that year. You just cannot go by that metric.

If you come up with an algorithm that says “Buy when Shiller P/E drops below X and sell when it rises above Y”, then we have something to chew on but I’m sure that many of Prof Shiller’s Ph.D. students had investigated that strategy going back 150 years of data and came up empty.

4 Likes

Will it correct back to the historical average of 16? Yes it will.

Or, probably not since accounting standards have changed significantly so that more is required to be expensed, lowering earnings and raising PEs with no real change in the business.

3 Likes

Take indicators with a grain of salt and concentrate on your specific assets.

If there is one indicator that makes sense it is interest rates. cc, for 20+ years we’ve been in a falling rate environment - now the reverse seems likely, perhaps to levels many younger investors haven’t seen in a generation. It was easy to own companies when the 10 year treasury was under 2%. What happens if it moves to 4 or 5%?

Everybody tells me not worry, and they are probably right. But if there is any chance we hit 5%, then valuations are going to correct with a vengeance…maybe the growth in E will be enough to overcome it, but I wonder.

Maybe this guy is totally wrong:

http://www.barrons.com/articles/gundlach-bond-yields-could-h…

I hope so. I never worried about macro in my entire career, but then again:

http://www.businessinsider.com/10-year-us-treasury-note-yiel…

we were on the downside of rates, not the opposite

course, this is----->…useless macro pondering…

1 Like

Everybody tells me not worry, and they are probably right. But if there is any chance we hit 5%, then valuations are going to correct with a vengeance…maybe the growth in E will be enough to overcome it, but I wonder.

Will rates go up? Probably because they are being held artificially low (by meddling, bumbling, central bankers).

But… interest rates are the cost of money (the risk free rate) plus the risk rate (inflation, confidence in getting the money back from the borrower). I’m of the opinion that since money became truly fiat money, totally independent from gold and other commodities after Nixon closed the gold window, the risk free rate is vanishingly small (the cost of printing replacement dollar bills) and that rate will never rise again unless we go back to commodity money which is not likely. The risk rate I cannot predict.

If the forecasters are basing their predictions on history when the gold standard existed, they will most likely be wrong. I never tire of repeating:

“It is not enough to know what the chart is saying. You have to find out why it’s saying whatever it is saying.”

If the risk free rate component remains near zero, how do you predict inflation and borrower confidence which are the only two components left?

Next, is there anything you and I can do about it?

If the rate rises from zero to five percent in five years, do we have time enough on the way to react to it?

If they can’t predict the interest rate and we can’t do anything about it anyway but we have lots of time to react to whatever happens, where are the grounds for worrying? It’s just business as usual.

Denny Schlesinger

2 Likes

Really guys, THIS BOARD IS DEFINITELY NOT ABOUT THE SCHILLER INDEX. There are places TA discussions are very welcome. PLEASE don’t bring them here.
Thanks!
Saul

4 Likes

If a crash is coming economists and stock market pundits will be the last to know.

I know a crash is coming. Based on long history of markets of all kinds and sorts.

Alas I have no idea when, so that information is not much use to me.

Bringing it down to the individual stock level I can find few bargains. That’s not to say that a non cheap stock can’t get even more expensive.