Post New

As Jim and others have aptly commented that market valuations currently seem very high, the natural question is: are such valuations justified, and can the levels of valuation be supported by future growth that would seem to be currently priced in and required?

By my (overly simplistic?) way of thinking, a significant amount of market growth was driven by the following over the past number of years:

1. Population growth (this doesn't seem to get much press, but is sure feels like a big one to me).
2. Productivity gains (and these have been numerous).
3. Considerable debt accumulation (spend now to grow, at the (possible) expense of future growth).


So if we evaluate each of the items above that have led to economic growth and market appreciation:

1. Population growth sure isn't what it used to be. The numbers speak for themselves, particularly across developed countries. Counting on population growth to support market gains over the next (say 10) years would seem like a huge stretch.

2. Debt accumulation. Can we take on even more debt to help drive near-term growth? Perhaps, but again, this feels like a stretch to me as well. If governments were spending on things that would really drive economic growth, maybe. But call me a skeptic I guess. This also feels like a stretch to me.

3. Productivity gains. This is a wild card. On one hand, the gains we've seen in the last 50 years have been (IMO) remarkable. I won't even try to list them. With the AI craze, lots of people (some of which are pretty darn bright) are projecting massive productivity gains in our relatively near future. I'm in the "maybe" camp on this one. On one hand some of a capabilities are quite remarkable. On the other hand, I'm not so sure we've seen layoffs quite like what you'd expect if those gains were as massive as hoped. Perhaps this is coming??? I worked in the AI field years ago before it was popular, so have a bit of experience with this.

As someone who recently retired, this stuff nags at me a bit. I'm curious to see if others are also feeling mildly nervous about this, or if I'm just part of "the old guys are always worried" crowd. For me, I plan on dusting off and re-testing things that may help with more conservative asset allocation. I'm loathe to call it market timing, but... asset allocation and market timing kind of go hand in hand.

If I'm missing something, I'm all ears. If you're feeling some of these things, then I know I'm not the only one with some jitters.


Thanks, Lee

If I'm missing something, I'm all ears. If you're feeling some of these things, then I know I'm not the only one with some jitters.

"Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -- John Templeton

I get market outlook & commentary from a couple of sources, one paid one free.
One recently remarked that the one-week sharp drop was almost totally recovered in the next week. That it was more of a "let's see if we can panic the little investors and get them to sell cheap" move by the large investors than a real drop.

He also talks about the price action in CEFs vs. ETFs. He says CEFs are flighty, much sharper ups & downs than ETFs. That CEFs are heavily owned by small investors and ETFs more by large institutional investors. Small investors are more prone to act on short-term emotion.

Almost all of them point out that quick sharp drops are common and are almost always recovered. That bear markets start slowly, not quickly.

The other was https://www.youtube.com/watch?v=eByiWIrVCLo
"Fisher Investments Reviews Current Investor Sentiment and What it Means for Markets"

Key remark: "Ken believes we are in the early stages of optimism, but not yet to euphoria."

We are still above the 10 month SMA of the S&P500, so the signal says to stay invested.


It's okay to feel nervous. But "Emotions are not tools of cognition."

How might the large corporate tax cut initiated about six years ago influence stock prices?

Tom

Population growth sure isn't what it used to be. The numbers speak for themselves, particularly across developed countries. Counting on population growth to support market gains over the next (say 10) years would seem like a huge stretch.

The world population growth of 15 to 64 year olds is projected by the UN to increase by about 20% over the next 20 to 25 years. I think they should be able to keep sales growth increasing as the living standards in developing countries are increasing along with the population growth.


https://ourworldindata.org/grapher/population-youn...

Aussi

Corporate effective taxes haven't changed much since 2010. There were big changes in the effective corporate tax rate in 2001 and 2008.

Corporate effective tax rate
1960 40%
1982 22%
1986 34%
1999 29%
2002 20%
2009 14%
2024 17%

Corporate Profits After Tax (without IVA and CCAdj)/National income: Corporate profits before tax (without IVA and CCAdj)
https://fred.stlouisfed.org/graph/?g=1towB

But corporate taxes are secondary. The main constraint is world GDP, which can be adjusted for corporate tax rates.

U.S. MktCap / World GDP
https://fred.stlouisfed.org/graph/?g=1tooO

U.S. MktCap / (World GDP * Profits After Tax / Profits Before Tax)
https://fred.stlouisfed.org/graph/?g=1tNUb

(MktCap/tax-adjusted world GDP) fell in the early 1970s because of inflation. MCTAWGDP was around 0.2 from 1974 to 1991. The dotcom boom pushed MCTAWGDP to a high of 0.75 in 2000. MCTAWGDP was 0.70 in 2023.

Market Cap = World GDP * MCTAWGDP

World GDP has increased about 4.7% per year since 1990.
Gross Domestic Product for World
https://fred.stlouisfed.org/graph/?g=1tNWQ

The multiple MCTAWGDP is near the high end of its historical range of 0.15 to 0.75. MCTAWGDP in 2024 might be around 0.78 (this is the 2023 value * MktCap change / GDP change = 0.70 * 1.17 / 1.05). Negative news could send MCTAWGDP much lower. Continued positive news could nudge MCTAWGDP slightly higher.

We are still above the 10 month SMA of the S&P 500
Right, but the slopes of the SMA's are falling, so this

bear markets start slowly
might(!?) be in the making.

"We are still above the 10 month SMA of the S&P 500"
Right, but the slopes of the SMA's are falling,

From Yahoo just now, the DJIA
Day's Range	41,435.20 - 41,734.00
52 Week Range	32,327.20 - 41,734.00

I could be wrong, but I don't think bear markets generally start when the market is printing new all-time highs.
BWDIK


"bear markets start slowly"
might(!?) be in the making.

The point was that there is plenty of time to get out of a bear market before it takes the final plunge.
You don't even need to be on a hair trigger with the 10 month (200 day or 42 week) SMA. My backtest shows that staying invested until there has been 4 consecutive week of S&P500 below the SMA is fine.

Your timing strategy is fine if it gets you out at a 15% loss before the deep 40% loss.
That's all you need. You don't want one that takes you out at a 10% loss just before a 20% gain.

Your timing strategy is fine if it gets you out at a 15% loss before the deep 40% loss.
That's all you need. You don't want one that takes you out at a 10% loss just before a 20% gain.


Appreciate the inputs... I probably phrased my first comment somewhat inaccurately when I said I have the jitters. I should have said that current conditions are making me very likely to follow some type of re-allocation strategy (if more market action starts to truly perform poorly, such as the 99 day high rule being violated, etc.) as opposed to a buy-and-hold (stay in equities no matter what) strategy for my current equity allocation.

----

Thanks as well for the link regarding population. I need to study that more. A population rate of around 1% a year still seems pretty small to me, but perhaps I have my facts messed up with earlier growth rates. It's better than a shrinking population, but if an aging population puts pressure on equities (i.e., the baby boomers starting to spend down retirement nest eggs) and we have a pretty anemic rate of population growth, then to what extent 1% pop growth can really help GDP seems a bit in question to me.


Lee

I should have said that current conditions are making me very likely to follow some type of re-allocation strategy (if more market action starts to truly perform poorly, such as the 99 day high rule being violated, etc.) as opposed to a buy-and-hold.

Okay. Here are some more thoughts:

"The historical evidence is clear that the winning strategy in both stocks and bonds is to ignore all forecasts and stick to a well-developed plan." -- Larry Swedroe

One on point for the last part of your sentence:
"Being forced to sell at a loss isn't necessarily bad. There are plenty of Japanese and European investors that would love a second chance to sell at a 30% loss. You either have a plan or you don't. You either have discipline or you don't. Expecting all investments to just somehow work out by the virtue of patience is incompatible with reality."

That kinda says that you NEED to have a plan for dealing with bear markets. Or not. Statistically, timing improves the short-term swings but not the long-term returns, vs. buy-and-hold.

From experience I know that it is much easier emotionally if you have a sound plan that you have confidence in and KNOW that you will follow no matter what your emotions say.

There are a lot of potential plans, such as 99 day high, NH/NL, etc. The problem with looking at a number of plans is that you don't have a plan, you have a handful of sorta, kinda, pick-and-choose plans. That are never in 100% agreement, so you decide on the fly which to listen to and which to ignore.

I am partial to Growth Trend Timing. A 50+ page paper, but it's easy to do on your own (don't lean on others to run your timing signals, do it yourself). I backtested it with actual historical data and am satisfied.
https://www.philosophicaleconomics.com/2016/01/gtt...

"The historical evidence is clear that the winning strategy in both stocks and bonds is to ignore all forecasts and stick to a well-developed plan." -- Larry Swedroe


A possible re-write of that:

"The historical evidence is clear that the winning strategy in both stocks and bonds is to ignore all forecasts and stick to a well-developed plan based on the fact that the likely forward real returns depend more than anything else on starting valuation levels." It's not a precise science, but it's better to be approximately right than precisely wrong. If something you own is very very expensive, you probably won't have a decent return if you own it for a long time.

As an extreme example, but (for many people) a shocking one, if you buy bonds with a negative real return and hold them till maturity, you will end up losing wealth. And, only slightly less obvious, if your equity portfolio has a low cyclically adjusted earnings yield, you shouldn't expect a forward return very much more than that. (Plus maybe 2 %/year for trend GGP growth, to be generous, but less than that if future valuation levels are lower than when you start).

If you're an active trader and do a meaningful amount of "buy low sell higher" (as with most of us here), then that rule doesn't apply. But on average, axiomatically, investors as a group won't manage that, so you have to be smarter than the average bear. It's entirely reasonable to try to beat the market, but it's also entirely reasonable to assume for planning purposes that you won't succeed.

Jim

He says CEFs are flighty, much sharper ups & downs than ETFs.

So if one is buying a dip CEFs are a better place to look?

DB2

Absolutely.

Post New

Berkshire Hathaway FAQ

---

Contact Shrewd'm
Contact the developer of these message boards.