No. of Recommendations: 17
I do love that chart's narrative, but it does come with the health warning that you never know where you are on it : )
It's true that there are pockets of the market that seem very optimistic lately. I guess that's always the case, but I find some straws in the wind are quite striking.
For example, according to Bank of America's strategy team, the typical equity beta within private client portfolios in 2009 was about 0.75 and the equity allocation was 39%. Today the beta is 1.20 and equity allocation is 60%. The total equity market exposure, the product of the two, suggests a pretty substantial amount of confidence on this permanently high plateau.
Breadth is terrible, often seen when a bull market is on its last legs. The S&P has had a total return of about 17.3% year to date, but the median stock within it has managed under 5.5%.
And of course some valuation metrics seem high, as they of course seem to have been for a long time. Over the long run, profits can't rise faster than sales. As a pointer to how much net margins have expanded in recent years, (remembering that this is something that is cyclical, not extrapolatable), real S&P 500 sales rose inflation + 1.50%/year in the 16.25 years to March, while net earnings rose inflation + 3.42%. The start date was chosen to be neither unusually high nor unusually low. So, the real index returns without dividends can be though of as growth in the revenue of 1.5%/year, plus 1.9%/year of unreproducible net margin expansion, plus 1.9%/year in growth in valuation multiples (without cyclical adjustment on earnings). That is, most of the returns before dividends have been from effects that are either transient or at best a one time bump. Extrapolation from here would be presumably be unwise. A much better back-of-the-envelope is that a long term holder of SPY ought to expect the dividend yield plus real GDP growth. Both ideally with cyclical adjustments for the starting point, but both metrics are pretty steady. The current dividend yield is around 1.5%, and US real GDP growth is likely be around 2% in the next several years, give or take. A person retiring today and buying SPY ought to plan on getting no more than inflation + 3.5%/year indefinitely.
Other than just before I paid off a mortgage a few years ago, I've raised more cash this year than I've had in quite some time. That doesn't mean I think the market will plunge any time soon, but cash has many potential uses. And Berkshire, though not overpriced, has been more expensive than this only around 10% of the time in the ~15 years since the credit crunch so that recent history does not really lead one to expect a positive real return in the next year.
Jim
