Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

https://www.vanguard.ca/en/advisor/insi ... 51854327=1
One of the key takeaways from our economic and market outlook shouldn’t be a surprise. We’ve said for a few years that U.S. equity valuations were approaching “stretched” territory. A strong 2021 run-up in prices driven more by valuation expansion than by increased profits makes U.S. equities more overvalued than at any other time since the dot-com bubble.

Our assessment is based on the latest quarterly running of the Vanguard Capital Markets Model® (VCMM), as of September 30, 2021. Our model considers equity valuations relative to their fair value, conditional on interest rates and inflation. Rising interest rates erode the present value of future cash flows, so interest rates and inflation tend to influence equity market valuations—and, by extension, prices.
Image
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

This graph excellently displays perfectly the reasoning for such strong strong US returns the past 35 years - valuation expansion (low to high) explains a lot of it (relative to similar asset classes that had the opposite occur)

Also showcases periods where US TSM was a very poor investment, coinciding with very high valuations (60s - early 80s) - valuations went from high to low.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Marseille07 »

The hard part is we don't know if we're about to crash.

Last year CAPE was hitting 30, and boom, we're having a +25% year. Which means it was a good idea to buy into it despite high CAPE.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

Marseille07 wrote: Mon Dec 06, 2021 10:59 pm The hard part is we don't know if we're about to crash.

Last year CAPE was hitting 30, and boom, we're having a +25% year. Which means it was a good idea to buy into it despite high CAPE.
The article does talk about this. We'd probably need to get to CAPE10 PE50 before looking similarly overvalued as the 2000 bubble.
Although our model provides a 10-year outlook for equity returns, it doesn’t provide insight as to when and how a return to fair value may occur. “There is nothing in valuation levels’ relationships with interest rates and inflation that keeps an overvalued market from continuing on to greater highs,” said Kevin DiCiurcio, who leads the VCMM research team. “You look at the growing deviation in the late 1990s; that lasted five years before it returned to fair value.”
Last edited by Nathan Drake on Mon Dec 06, 2021 11:02 pm, edited 1 time in total.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
TheDDC
Posts: 1604
Joined: Mon Jan 08, 2018 10:11 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by TheDDC »

I was just told on the BH forum last night that we are "buy and hold" (which is really "buy and hide" the way this individual was presenting it, but anyway...) investors, so why would valuations even matter for those of us who just continue to buy in consistently at 100/0?

-TheDDC
Rules to wealth building: 75-80% VTSAX piled high and deep, 20-25% VTIAX, 0% given away to banks.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

TheDDC wrote: Mon Dec 06, 2021 11:02 pm I was just told on the BH forum last night that we are "buy and hold" (which is really "buy and hide" the way this individual was presenting it, but anyway...) investors, so why would valuations even matter for those of us who just continue to buy in consistently at 100/0?

-TheDDC
It may not be actionable. I certainly wouldn't use this as evidence to go 100% cash or bonds. But it may be an opportunity to take risk off the table, or diversify outside of such an overvalued market if you can't stick with the long-term consequences of mean reversion.

Bogle did this right before the tech bubble, but he sinned quite a lot by reducing stock allocation to 35%. He would not recommend anyone else do this, but it would be interesting to hear his thoughts on today's markets if he were alive today.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
venkman
Posts: 1338
Joined: Tue Mar 14, 2017 10:33 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by venkman »

TheDDC wrote: Mon Dec 06, 2021 11:02 pm I was just told on the BH forum last night that we are "buy and hold" (which is really "buy and hide" the way this individual was presenting it, but anyway...) investors, so why would valuations even matter for those of us who just continue to buy in consistently at 100/0?
CAPE isn't useful for market timing, but it can be useful for long term planning. A high CAPE today is a reasonably good predictor of below-average returns over the next decade; if one wished to retire in 2031, they should plan for lower stock returns between now and then.

If one's time horizon is 20+ years, it likely won't matter too much.
visualguy
Posts: 2988
Joined: Thu Jan 30, 2014 12:32 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by visualguy »

Nathan Drake wrote: Mon Dec 06, 2021 11:04 pm It may not be actionable. I certainly wouldn't use this as evidence to go 100% cash or bonds. But it may be an opportunity to take risk off the table, or diversify outside of such an overvalued market if you can't stick with the long-term consequences of mean reversion.
Are there graphs for other markets? Not sure what markets are not at high valuations and don't suffer from serious issues (such as China).
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

visualguy wrote: Mon Dec 06, 2021 11:23 pm
Nathan Drake wrote: Mon Dec 06, 2021 11:04 pm It may not be actionable. I certainly wouldn't use this as evidence to go 100% cash or bonds. But it may be an opportunity to take risk off the table, or diversify outside of such an overvalued market if you can't stick with the long-term consequences of mean reversion.
Are there graphs for other markets? Not sure what markets are not at high valuations and don't suffer from serious issues (such as China).
That would be nice to see but they didn’t create a similar graph.

EM is roughly half as cheap. But stocks in the short term are risky regardless of valuation levels
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
fisher0815
Posts: 155
Joined: Tue Jun 08, 2021 3:10 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by fisher0815 »

I think the U.S. stock market today is a lot different as it was in the past, where more cyclical industrial companies dominated the index, which means more shaky earnings and more risk. If my thesis is true, it's delusive to compare past valuations with today.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

fisher0815 wrote: Mon Dec 06, 2021 11:37 pm I think the U.S. stock market today is a lot different as it was in the past, where more cyclical industrial companies dominated the index, which means more shaky earnings and more risk. If my thesis is true, it's delusive to compare past valuations with today.
If this is true then the valuations theory is still applicable

Less risk = less expected return
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Marseille07 »

Nathan Drake wrote: Mon Dec 06, 2021 11:01 pm The article does talk about this. We'd probably need to get to CAPE10 PE50 before looking similarly overvalued as the 2000 bubble.
And that's the hard part right? If 2021 were 1997 or even 1998, you'd be better off holding US equities despite a crash coming 2~3 years later.
User avatar
Beensabu
Posts: 5618
Joined: Sun Aug 14, 2016 3:22 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Beensabu »

TheDDC wrote: Mon Dec 06, 2021 11:02 pm I was just told on the BH forum last night that we are "buy and hold" (which is really "buy and hide" the way this individual was presenting it, but anyway...) investors, so why would valuations even matter for those of us who just continue to buy in consistently at 100/0?
I read that exchange. Pretty sure you said you wouldn't be buying consistently (or holding anything) if you encountered 5 years of poor performance. OP has consistently said that high valuations at one point usually mean extended poor performance down the line. That's how it would matter to you. I don't know about other 100/0 folks.
"The only thing that makes life possible is permanent, intolerable uncertainty; not knowing what comes next." ~Ursula LeGuin
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

Marseille07 wrote: Mon Dec 06, 2021 11:41 pm
Nathan Drake wrote: Mon Dec 06, 2021 11:01 pm The article does talk about this. We'd probably need to get to CAPE10 PE50 before looking similarly overvalued as the 2000 bubble.
And that's the hard part right? If 2021 were 1997 or even 1998, you'd be better off holding US equities despite a crash coming 2~3 years later.
Technically you would have been a lot better off ensuring you were diversified into EM and SCV during this period despite the meltup

It took a decade to post a real return. That’s a very long time
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
User avatar
peskypesky
Posts: 1023
Joined: Fri Mar 08, 2013 7:56 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by peskypesky »

Nathan Drake wrote: Mon Dec 06, 2021 11:38 pm
fisher0815 wrote: Mon Dec 06, 2021 11:37 pm I think the U.S. stock market today is a lot different as it was in the past, where more cyclical industrial companies dominated the index, which means more shaky earnings and more risk. If my thesis is true, it's delusive to compare past valuations with today.
If this is true then the valuations theory is still applicable

Less risk = less expected return
not if the government keeps printing money, resulting in the inflation of stocks. the returns are almost guaranteed through dollar printing, even if there is little risk.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

peskypesky wrote: Tue Dec 07, 2021 12:55 am
Nathan Drake wrote: Mon Dec 06, 2021 11:38 pm
fisher0815 wrote: Mon Dec 06, 2021 11:37 pm I think the U.S. stock market today is a lot different as it was in the past, where more cyclical industrial companies dominated the index, which means more shaky earnings and more risk. If my thesis is true, it's delusive to compare past valuations with today.
If this is true then the valuations theory is still applicable

Less risk = less expected return
not if the government keeps printing money, resulting in the inflation of stocks. the returns are almost guaranteed through dollar printing, even if there is little risk.
There are limits to money printing, such as what we are seeing now with inflation
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Marseille07 »

Nathan Drake wrote: Tue Dec 07, 2021 12:39 am Technically you would have been a lot better off ensuring you were diversified into EM and SCV during this period despite the meltup

It took a decade to post a real return. That’s a very long time
That's because you're including the period after the dot-com. The issue with that is, EM and SCV doing well 2001~2008 was unknowable; certainly had nothing to do with CAPE as CAPE came down in 2000.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

Marseille07 wrote: Tue Dec 07, 2021 1:01 am
Nathan Drake wrote: Tue Dec 07, 2021 12:39 am Technically you would have been a lot better off ensuring you were diversified into EM and SCV during this period despite the meltup

It took a decade to post a real return. That’s a very long time
That's because you're including the period after the dot-com. The issue with that is, EM and SCV doing well 2001~2008 was unknowable; certainly had nothing to do with CAPE as CAPE came down in 2000.
Including the period before, too.

It has a lot to do with CAPE since EM and SCV were valued much lower than US TSM, thus higher expected returns
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
klaus14
Posts: 953
Joined: Sun Nov 25, 2018 6:43 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by klaus14 »

Nathan Drake wrote: Mon Dec 06, 2021 11:28 pm
visualguy wrote: Mon Dec 06, 2021 11:23 pm
Nathan Drake wrote: Mon Dec 06, 2021 11:04 pm It may not be actionable. I certainly wouldn't use this as evidence to go 100% cash or bonds. But it may be an opportunity to take risk off the table, or diversify outside of such an overvalued market if you can't stick with the long-term consequences of mean reversion.
Are there graphs for other markets? Not sure what markets are not at high valuations and don't suffer from serious issues (such as China).
That would be nice to see but they didn’t create a similar graph.

EM is roughly half as cheap. But stocks in the short term are risky regardless of valuation levels
Vanguard thinks EM is also overvalued (not as much as US). This is in contrast with other firms.
Other firms also agree EAFE is more fairly priced compared to US.
See page 88 here.

-------

Looking at forward P/Es here, EM and EAFE is within pre-pandemic range. Whereas, US is above it.

Another interesting chart is in Figure 12 here. It shows US Value and International tracks each other and today is same. In Figure 11 you can see the reason US is expensive is US Growth.

Also check PEG ratios here for US Value vs Growth in Figure 18. This means US Growth is expensive even if you factor in optimistic earnings growth expectations.

The summary is that US Growth is expensive. But other classes are not expensive. Underweight US growth. Overweight International and Value.
Last edited by klaus14 on Tue Dec 07, 2021 1:17 am, edited 2 times in total.
My investment algorithm: https://www.bogleheads.org/forum/viewtopic.php?f=10&t=351899&p=6112869#p6112869
000
Posts: 8211
Joined: Thu Jul 23, 2020 12:04 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by 000 »

We've been hearing this for years now.

Although I'm as skeptical about these valuations as anyone perhaps this epic everything bubble still has plenty of room to run.

I'm not putting (lol) my shorts on yet..... It's December after all!! :shock:
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

klaus14 wrote: Tue Dec 07, 2021 1:07 am
Nathan Drake wrote: Mon Dec 06, 2021 11:28 pm
visualguy wrote: Mon Dec 06, 2021 11:23 pm
Nathan Drake wrote: Mon Dec 06, 2021 11:04 pm It may not be actionable. I certainly wouldn't use this as evidence to go 100% cash or bonds. But it may be an opportunity to take risk off the table, or diversify outside of such an overvalued market if you can't stick with the long-term consequences of mean reversion.
Are there graphs for other markets? Not sure what markets are not at high valuations and don't suffer from serious issues (such as China).
That would be nice to see but they didn’t create a similar graph.

EM is roughly half as cheap. But stocks in the short term are risky regardless of valuation levels
Vanguard thinks EM is also overvalued (not as much as US). This is in contrast with other firms.
Other firms also agree EAFE is more fairly priced compared to US.
See page 88 here.

-------

Looking at forward P/Es here, EM and EAFE is within pre-pandemic range. Whereas, US is above it.

Another interesting chart is in Figure 12 here. It shows US Value and International tracks each other and today is same. In Figure 11 you can see the reason US is expensive is US Growth.

Also check PEG ratios here for US Value vs Growth in Figure 18. This means US Growth is expensive even if you factor in optimistic earnings growth expectations.

The summary is that US Growth is expensive. But other classes are not expensive.
Interesting link, thanks for posting

I think Vanguard may have considered EM large to be a bit higher valued, but EM Value cheap

I agree with your thesis and as you can tell in my signature my portfolio heavily slants to International and Value
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Northern Flicker
Posts: 15289
Joined: Fri Apr 10, 2015 12:29 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Northern Flicker »

fisher0815 wrote: Mon Dec 06, 2021 11:37 pm I think the U.S. stock market today is a lot different as it was in the past, where more cyclical industrial companies dominated the index, which means more shaky earnings and more risk. If my thesis is true, it's delusive to compare past valuations with today.
Delusive indeed, but also delusive to assume the market has made the shift you describe. "This time is different" comes to mind. In truth, nobody knows.
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by nigel_ht »

Nathan Drake wrote: Tue Dec 07, 2021 12:39 am
Marseille07 wrote: Mon Dec 06, 2021 11:41 pm
Nathan Drake wrote: Mon Dec 06, 2021 11:01 pm The article does talk about this. We'd probably need to get to CAPE10 PE50 before looking similarly overvalued as the 2000 bubble.
And that's the hard part right? If 2021 were 1997 or even 1998, you'd be better off holding US equities despite a crash coming 2~3 years later.
Technically you would have been a lot better off ensuring you were diversified into EM and SCV during this period despite the meltup

It took a decade to post a real return. That’s a very long time
Any money invested after 2001 or before 1999 recovered by 2004. 2003 was a good year to invest.

Money invested from 1999 through 2001 took a decade to recover (including inflation) but that’s 3 years out of an expected 30 years of investing.
TheoLeo
Posts: 575
Joined: Mon Apr 02, 2018 11:39 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by TheoLeo »

It is hard to think US stocks are overvalued when the biggest stocks in the US still look cheap compared to most other stocks in the global stock market.
Apple: PE 28, doubled its earnings in the last 5 years
Microsoft: PE 36, tripled its earnings in the last 5 years
Alphabet: PE 27, tripled its earnings in the last 5 years
Facebook: PE 21, quadrupled its earnings in the last 5 years

Sometimes I wonder why I don´t just own big tech. Why are they still so cheap compared to the rest of the market?
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by nigel_ht »

venkman wrote: Mon Dec 06, 2021 11:17 pm
TheDDC wrote: Mon Dec 06, 2021 11:02 pm I was just told on the BH forum last night that we are "buy and hold" (which is really "buy and hide" the way this individual was presenting it, but anyway...) investors, so why would valuations even matter for those of us who just continue to buy in consistently at 100/0?
CAPE isn't useful for market timing, but it can be useful for long term planning. A high CAPE today is a reasonably good predictor of below-average returns over the next decade; if one wished to retire in 2031, they should plan for lower stock returns between now and then.

If one's time horizon is 20+ years, it likely won't matter too much.
Why? If you believe this then shifting 10-15% to SCV or International makes sense even if the time horizon is 20+ years.

At some point the tilt will pay off even if the US market continues upward another few years.
nigel_ht
Posts: 4742
Joined: Tue Jan 01, 2019 9:14 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by nigel_ht »

TheoLeo wrote: Tue Dec 07, 2021 6:24 am It is hard to think US stocks are overvalued when the biggest stocks in the US still look cheap compared to most other stocks in the global stock market.
Apple: PE 28, doubled its earnings in the last 5 years
Microsoft: PE 36, tripled its earnings in the last 5 years
Alphabet: PE 27, tripled its earnings in the last 5 years
Facebook: PE 21, quadrupled its earnings in the last 5 years

Sometimes I wonder why I don´t just own big tech. Why are they still so cheap compared to the rest of the market?
The bigger you get the harder it is to keep doubling?

On the plus side, the Chinese cutting the legs out from under their tech giants mean they won’t expand globally anywhere as quickly.
User avatar
dogagility
Posts: 3201
Joined: Fri Feb 24, 2017 5:41 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by dogagility »

Nathan Drake wrote: Mon Dec 06, 2021 10:51 pm ...
What's your point? Going to market time and reduce your equity allocation?
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
User avatar
dogagility
Posts: 3201
Joined: Fri Feb 24, 2017 5:41 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by dogagility »

Nathan Drake wrote: Mon Dec 06, 2021 10:51 pm ...
What's your point? Going to market time and reduce your equity allocation? Chase underperformance and exchange US Market for International?
Make sure you check out my list of certifications. The list is short, and there aren't any. - Eric 0. from SMA
Zeno
Posts: 1042
Joined: Wed Sep 12, 2018 10:44 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Zeno »

nigel_ht wrote: Tue Dec 07, 2021 6:20 am Any money invested after 2001 or before 1999 recovered by 2004. 2003 was a good year to invest.

Money invested from 1999 through 2001 took a decade to recover (including inflation) but that’s 3 years out of an expected 30 years of investing.
This is a great thread; thank you, OP, and everybody else.

As to the above, thank you, nigel_ht. It does seem to be a key point. We've been tossing dollars every month into broad market funds since 1986, and continue to do so. If I wanted to (and I don't) how do I can account for the presumably wildly crazy increase in the value of the shares I purchased in August of 1986 in the face of a possible coming market downturn? In contrast, if I spend the last two years of my accumulation phase DCA'ing at high valuations and then the market drops, should I worry too much about that either?

It just seems that for long-term, DCA'ing investors, much of this is also noise. Markets go up and down. The future cannot be predicted. We all know these things. At some point in my retirement (if I live so long) I will be liquidating shares that have been in the market for 60, maybe 70, years. In the absence of a calamity (which I concede could always occur) I'm just not going to lose too much sleep over any of this either.
TheoLeo
Posts: 575
Joined: Mon Apr 02, 2018 11:39 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by TheoLeo »

nigel_ht wrote: Tue Dec 07, 2021 6:27 am
TheoLeo wrote: Tue Dec 07, 2021 6:24 am It is hard to think US stocks are overvalued when the biggest stocks in the US still look cheap compared to most other stocks in the global stock market.
Apple: PE 28, doubled its earnings in the last 5 years
Microsoft: PE 36, tripled its earnings in the last 5 years
Alphabet: PE 27, tripled its earnings in the last 5 years
Facebook: PE 21, quadrupled its earnings in the last 5 years

Sometimes I wonder why I don´t just own big tech. Why are they still so cheap compared to the rest of the market?
The bigger you get the harder it is to keep doubling?

On the plus side, the Chinese cutting the legs out from under their tech giants mean they won’t expand globally anywhere as quickly.
Even if they just double in the next 10 years, you would own them at a reasonable PE if you buy today. I have no idea how big the cloud market will eventually be, but maybe there is still a lot of growth left.
Parkinglotracer
Posts: 3919
Joined: Fri Dec 20, 2019 2:49 am
Location: Upstate NY

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Parkinglotracer »

If we are diversified and have an appropriate AA for our risk tolerance this is nice to know but matters not. To me it serves as a reminder to check my desired AA. A 20-30 % market correction on occasion gives a needed gut check to ones AA. We haven’t seen that for a long time but surely will see it again someday. David Solomon of Goldman Sachs is on squawkbox now saying people have forgot what financial markets can be like and it is appropriate to take actions to mitigate risks. All common sense. My rule of thumb is if I have money I am planning to use in the next 5 years it’s not in equities.
User avatar
nisiprius
Advisory Board
Posts: 52105
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by nisiprius »

"US equities are overvalued" is interesting if you have already decided that your personal strategy is to take action based on valuations; that is, to practice some form of tactical asset allocation.

For as long as I've been paying attention, the majority of people associated with the investment industry have been saying that you should constantly be taking action based on valuations. It has always been pretty much the conventional wisdom. Tactical asset allocation was once embodied in the mainstream balanced funds offered in 401(k) plans, such as Fidelity Asset Manager (in my employer's plan), or the Vanguard LifeStrategy Funds (for much of their existence until they abandoned it circa 2011).

And for as long as I've been paying attention, John C. Bogle, while alive, said not to do that
There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.
He wasn't the only one.

What Warren Buffett's mentor, Benjamin Graham, said was not as absolute, yet it was similar. After saying that the investor should never be outside the range 75/25 to 25/75, he said
There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums....

According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the “bargain price” levels created in a protracted bear market. Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgment of the investor the market level has become dangerously high. These copybook maxims have always been easy to enunciate and always difficult to follow—because they go against that very human nature which produces that excesses of bull and bear markets....

we can give the investor no reliable rules by which to reduce his common-stock holdings toward the 25% minimum and rebuild them later to the 75% maximum.
What's interesting here is that obviously Graham believed that it was possible to identify select, individual stock issues that were mispriced. (Or, at least, that it was possible from 1934 through 1976). Yet he did not suggest applying that kind of analysis to the market as a whole.

Just as it seems absurd that anybody with a little gumption couldn't do better than holding an index, it seems absurd that anyone with a little gumption couldn't do better than mechanically holding a fixed allocation. But the real-world track record of tactical asset allocation funds, which have mostly died out, shows that it is surprisingly difficult to improve on a fixed allocation.

If Benjamin Graham "could give no reliable rules" for adjusting asset allocation, we should be skeptical of people who say we should adjust them.

I expect there to be a market crash within my lifetime. I expect that when it happens I will be caught up in it and lose a lot of money for an indefinite period of time, long enough to impact our household financial picture. I have already taken that in account in setting our static asset allocation to something appropriate for our life stage (retired) and risk tolerance (conservative).
Last edited by nisiprius on Tue Dec 07, 2021 6:57 am, edited 3 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
burritoLover
Posts: 4097
Joined: Sun Jul 05, 2020 12:13 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by burritoLover »

Do any of these brokerage market analyses ever say "the future of the markets look great!" Perhaps this is just another marketing tool to scare you into moving under the Vanguard PAS umbrella (they've done the research - they know the markets - I should let them manage my money).
Zeno
Posts: 1042
Joined: Wed Sep 12, 2018 10:44 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Zeno »

TheoLeo wrote: Tue Dec 07, 2021 6:40 am Even if they just double in the next 10 years, you would own them at a reasonable PE if you buy today. I have no idea how big the cloud market will eventually be, but maybe there is still a lot of growth left.
+1

And it isn't just the cloud. It is AI, quantum computing, VR, the metaverse, merging of machines/peoples, space travel and countless other coming tech revolutions we can't even envision now. I'm not saying the companies referenced above are engaged in all these things. Nor am I saying the cloud is unrelated to them. And some or all of those companies might disappear (and certainly will), only to be replaced with new tech entrants whose names we don't yet know. I just suspect deep down in my DNA that if I could be teleported just a couple of decades ahead -- to the year 2040 -- I wouldn't be able to fathom the tech being then deployed, let alone the year 2080.

Considering that future, arguably the tech sector, as a sector (again, I'm not betting on any individual company by owning a specific stock) is grossly undervalued now.

For a possible peek at a possible future, peruse the website of the Future of Humanity Institute at the University of Oxford sometime: https://www.fhi.ox.ac.uk/.
Da5id
Posts: 5058
Joined: Fri Feb 26, 2016 7:20 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Da5id »

TheoLeo wrote: Tue Dec 07, 2021 6:40 am
nigel_ht wrote: Tue Dec 07, 2021 6:27 am
TheoLeo wrote: Tue Dec 07, 2021 6:24 am It is hard to think US stocks are overvalued when the biggest stocks in the US still look cheap compared to most other stocks in the global stock market.
Apple: PE 28, doubled its earnings in the last 5 years
Microsoft: PE 36, tripled its earnings in the last 5 years
Alphabet: PE 27, tripled its earnings in the last 5 years
Facebook: PE 21, quadrupled its earnings in the last 5 years

Sometimes I wonder why I don´t just own big tech. Why are they still so cheap compared to the rest of the market?
The bigger you get the harder it is to keep doubling?

On the plus side, the Chinese cutting the legs out from under their tech giants mean they won’t expand globally anywhere as quickly.
Even if they just double in the next 10 years, you would own them at a reasonable PE if you buy today. I have no idea how big the cloud market will eventually be, but maybe there is still a lot of growth left.
Do you actually think of "just double in the next 10 years", with the associated CAGR of 7.18%, is a *bad* case for the stock market??? It may not be exciting, but stock investors at all times should be prepared for much worse 10 year outcomes than that. Negative returns over 10 years for the US market have happened this century, not exactly ancient days. Recent huge returns make that easy to forget.

Maybe today's valuations make subpar returns going forward more likely than the historical average, maybe not. I'm not a believer in tactically allocating based on valuations. But certainly one should always be aware that the price you pay for the equity risk premium includes volatility and the chance of periods of really poor returns.
fisher0815
Posts: 155
Joined: Tue Jun 08, 2021 3:10 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by fisher0815 »

Nathan Drake wrote: Mon Dec 06, 2021 11:38 pm
fisher0815 wrote: Mon Dec 06, 2021 11:37 pm I think the U.S. stock market today is a lot different as it was in the past, where more cyclical industrial companies dominated the index, which means more shaky earnings and more risk. If my thesis is true, it's delusive to compare past valuations with today.
If this is true then the valuations theory is still applicable

Less risk = less expected return
I think there is no place to hide from less returns. With taking more risk, you can end up with even more less return.
Nobody knows which factor/asset class or AA will outperform in the future. You need luck to choose the right one. It's betting.

Everybody who was invested in the last 10 years should be more then satisfied with the outstanding return of the market. A future decade of low return shouldn't be a bad thing.
User avatar
JoMoney
Posts: 16260
Joined: Tue Jul 23, 2013 5:31 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by JoMoney »

I can't help but wonder if the U.S. dollar is more overvalued than any time since ... and the impact of that on investment inflation.
A lot of $ money has been "printed" and not a lot of "value" created. Money's value is only good for what it can be exchanged for. U.S. GNP/GDP hasn't skyrocketed the way the money supply has. Granted a lot of the money supply is just sitting on the books of banks/Fed, but a lot is also out in the system, and the $ that isn't spent on new stuff (GNP/GDP) finds its way into savings (back on the books of banks) and investment (stocks/real estate/other...)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
MarkBarb
Posts: 908
Joined: Mon Aug 03, 2009 11:59 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by MarkBarb »

The CAPE measure was invented by Robert Schiller. Even he no longer supports it being used the way Vanguard is using it. The problem with looking at CAPE by itself is the failure to consider the prices of alternative investments. Schiller now promotes looking at CAPE adjusted for interest rates. He calls the metric Excess CAPE Yield.

CAPE is an indicator of expected future returns. It shows low expected returns today, but interest rates are also very low. If you compare expected stock market returns to expected bond market returns, stock don't look overvalued.

My advice is to stick with your desired long-term asset allocation and lower your expectations for future returns.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

nigel_ht wrote: Tue Dec 07, 2021 6:20 am
Nathan Drake wrote: Tue Dec 07, 2021 12:39 am
Marseille07 wrote: Mon Dec 06, 2021 11:41 pm
Nathan Drake wrote: Mon Dec 06, 2021 11:01 pm The article does talk about this. We'd probably need to get to CAPE10 PE50 before looking similarly overvalued as the 2000 bubble.
And that's the hard part right? If 2021 were 1997 or even 1998, you'd be better off holding US equities despite a crash coming 2~3 years later.
Technically you would have been a lot better off ensuring you were diversified into EM and SCV during this period despite the meltup

It took a decade to post a real return. That’s a very long time
Any money invested after 2001 or before 1999 recovered by 2004. 2003 was a good year to invest.

Money invested from 1999 through 2001 took a decade to recover (including inflation) but that’s 3 years out of an expected 30 years of investing.
Any of this money was still better off invested in alternatives
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

burritoLover wrote: Tue Dec 07, 2021 6:51 am Do any of these brokerage market analyses ever say "the future of the markets look great!" Perhaps this is just another marketing tool to scare you into moving under the Vanguard PAS umbrella (they've done the research - they know the markets - I should let them manage my money).
Yes, they actually forecast decent returns for exUS and Value
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
random_walker_77
Posts: 2207
Joined: Tue May 21, 2013 8:49 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by random_walker_77 »

Da5id wrote: Tue Dec 07, 2021 7:22 am
TheoLeo wrote: Tue Dec 07, 2021 6:40 am Even if they just double in the next 10 years, you would own them at a reasonable PE if you buy today. I have no idea how big the cloud market will eventually be, but maybe there is still a lot of growth left.
Do you actually think of "just double in the next 10 years", with the associated CAGR of 7.18%, is a *bad* case for the stock market??? It may not be exciting, but stock investors at all times should be prepared for much worse 10 year outcomes than that. Negative returns over 10 years for the US market have happened this century, not exactly ancient days. Recent huge returns make that easy to forget.

Maybe today's valuations make subpar returns going forward more likely than the historical average, maybe not. I'm not a believer in tactically allocating based on valuations. But certainly one should always be aware that the price you pay for the equity risk premium includes volatility and the chance of periods of really poor returns.
I entered the workforce in 2000 and joined a hot little tech company that ended up doing very well. My job offer included a good-sized signing bonus and I thought about putting it towards my student loans, but ended up investing it all into tech stocks. Think about that timing.

After what happened later that year, I swore off individual stocks and stuck to market index funds. 10 years later, I was sad to see that my signing bonus was still down over the entire decade (in nominal terms, and even worse if you acknowledged inflation). At least my 401k was ok, since it was DCA's over the decade.

Thank goodness I didn't graduate in 2001. The job market in tech was absolutely brutal for those who graduated a year after me.
Topic Author
Nathan Drake
Posts: 6201
Joined: Mon Apr 11, 2011 12:28 am

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Nathan Drake »

TheoLeo wrote: Tue Dec 07, 2021 6:40 am
nigel_ht wrote: Tue Dec 07, 2021 6:27 am
TheoLeo wrote: Tue Dec 07, 2021 6:24 am It is hard to think US stocks are overvalued when the biggest stocks in the US still look cheap compared to most other stocks in the global stock market.
Apple: PE 28, doubled its earnings in the last 5 years
Microsoft: PE 36, tripled its earnings in the last 5 years
Alphabet: PE 27, tripled its earnings in the last 5 years
Facebook: PE 21, quadrupled its earnings in the last 5 years

Sometimes I wonder why I don´t just own big tech. Why are they still so cheap compared to the rest of the market?
The bigger you get the harder it is to keep doubling?

On the plus side, the Chinese cutting the legs out from under their tech giants mean they won’t expand globally anywhere as quickly.
Even if they just double in the next 10 years, you would own them at a reasonable PE if you buy today. I have no idea how big the cloud market will eventually be, but maybe there is still a lot of growth left.
Doubling in ten years probably does not justify PE multiples of 30+

They are priced that highly for a reason. Why should we assume that tech earnings just always go up at the rate they have for the past five years?
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
zkn
Posts: 67
Joined: Thu Oct 14, 2021 12:45 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by zkn »

MarkBarb wrote: Tue Dec 07, 2021 8:28 am The CAPE measure was invented by Robert Schiller. Even he no longer supports it being used the way Vanguard is using it. The problem with looking at CAPE by itself is the failure to consider the prices of alternative investments. Schiller now promotes looking at CAPE adjusted for interest rates. He calls the metric Excess CAPE Yield.

CAPE is an indicator of expected future returns. It shows low expected returns today, but interest rates are also very low. If you compare expected stock market returns to expected bond market returns, stock don't look overvalued.

My advice is to stick with your desired long-term asset allocation and lower your expectations for future returns.
Vanguard's fair-value CAPE has the same motivation as the Excess Cape Yield: "The U.S. fair-value CAPE (cyclically adjusted price/earnings ratio) is based on a statistical model that corrects CAPE measures for the level of inflation expectations and interest rates." Vanguard is controlling for real rates when noting the current CAPE is outside its range for fair value.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Marseille07 »

Nathan Drake wrote: Tue Dec 07, 2021 1:02 am Including the period before, too.

It has a lot to do with CAPE since EM and SCV were valued much lower than US TSM, thus higher expected returns
Not really. EM hasn't performed terribly well vs US TSM: https://www.portfoliovisualizer.com/bac ... ion2_2=100

Nothing to do with CAPE. Now, SCV might be an OK play.
AlohaBill
Posts: 759
Joined: Thu Jan 24, 2008 12:20 pm
Location: California

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by AlohaBill »

Dear Mr. duck,
I just don’t care . :D
Bill
User avatar
Forester
Posts: 2400
Joined: Sat Jan 19, 2019 1:50 pm
Location: UK

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Forester »

SCV is in line with historic valuations, total market... not so much https://twitter.com/hml_compounder/stat ... 98317?s=21

Many committed indexers will develop a sudden interest in SCV / intl after a couple of years relative bad performance.
Amateur Self-Taught Senior Macro Strategist
User avatar
vanbogle59
Posts: 1314
Joined: Wed Mar 10, 2021 7:30 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by vanbogle59 »

nisiprius wrote: Tue Dec 07, 2021 6:46 am
There is an implication here that the standard division should be an equal one, or 50–50, between the two major investment mediums....
I can never resist giving a shout out to 50/50!
Having stumbled into it based on self-reflection, ignorance, lack of confidence in anything else, as the least-worst option.....
Hooray when someone smart justifies it!
:sharebeer
Booogle
Posts: 605
Joined: Wed Nov 09, 2016 2:57 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Booogle »

Interest rates were very high in 2018 and 2019.

Yet the SCV boom didn't happen.

If anything SCV fell further behind.
Elysium
Posts: 4119
Joined: Mon Apr 02, 2007 6:22 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Elysium »

Marseille07 wrote: Tue Dec 07, 2021 9:45 am
Nathan Drake wrote: Tue Dec 07, 2021 1:02 am Including the period before, too.

It has a lot to do with CAPE since EM and SCV were valued much lower than US TSM, thus higher expected returns
Not really. EM hasn't performed terribly well vs US TSM: https://www.portfoliovisualizer.com/bac ... ion2_2=100

Nothing to do with CAPE. Now, SCV might be an OK play.
EM is highly risky, with very uneven distributions, therefore a couple of years even within a long time frame such as the one above could make a large difference. The beginning period for the chart above, for instance, 1995-1998 saw multiple crisis in EM regions while it was one of the most prosperous for the US. Especially just two years 1997-98. The Asian financial crisis of 1997, Russian debt crisis of 1998, Argentina depression/default of 1997/98, all saw EM getting rocked hard. If the chart is pushed to 1999 onwards which then hardly saw any major EM crisis to the extent of aforementioned events, then the numbers do look better from an absolute return perspective for EM, although with significantly higher volatility. Nature of EM means the countries that dominate it is also changing over a long period which makes it impossible to judge what future may look like based on past data. For instance, China represents half of EM today, and will have a much larger impact than any other country, China + India possibly constitutes 65% of EM market, both of these countries while emerging are far more stable than any other period. It's hard to judge what will happen in EM based on valuations, as small things cause big impacts. If someone were to invest in it then it will have to a lifetime strategy, or not at all. Bottomline, do not look at valuations and invest in EM, it is meaningless.
Last edited by Elysium on Tue Dec 07, 2021 10:23 am, edited 1 time in total.
Marseille07
Posts: 16054
Joined: Fri Nov 06, 2020 12:41 pm

Re: Vanguard: U.S. equities more overvalued than any time since the dot-com bubble

Post by Marseille07 »

Elysium wrote: Tue Dec 07, 2021 10:05 am EM is highly risky, with very uneven distributions, therefore a couple of years even within a long time frame such as the one above could make a large difference. The beginning period for the chart above, for instance, 1995-1998 saw multiple crisis in EM regions while it was one of the most prosperous for the US. Especially just two years 1997-98. The Asian financial crisis of 1997, Russian debt crisis of 1998, Argentina depression/default of 1997/98, all saw EM getting rocked hard. If the chart is pushed to 1999 onwards which then hardly saw any major EM crisis to the extent of aforementioned events, then the numbers do look better from an absolute return perspective for EM, although with significantly higher volatility. Nature of EM means the countries that dominate it is also changing over a long period which makes it impossible to judge what future may look like based on past data. For instance, China represents half of EM today, and will have a much larger impact than any other country, China + India possibly constitutes 65% of EM market, both of these countries while emerging are far more stable than any other period. It's hard to judge what will happen in EM based on valuations, as small things cause big impacts. If someone were to invest in it then it will have to a lifetime strategy, or not.
Yeah, that's why I'm pushing back on Nathan Drake's claim that casually said "hey look, EM and SCV looked great." Don't we all wish investing was that easy.
Post Reply