Dang it, Dan!!! Wut abooooowt yer truuuuuuhk??? 
1 Like
another link
text
Opinion: The S&P 500 is almost never this expensive. It’s a disaster waiting to happen.
Published: Oct. 2, 2024 at 1:59 p.m. ET
By
[
Brett Arends
](https://archive.ph/o/iQseX/https://www.marketwatch.com/topics/journalists/brett-arends)
We’ve surpassed 1929 levels
Nothing says we’re teetering on the brink of World War III quite like a U.S. stock market that’s even more expensive, in relation to its underlying fundamentals, than it was at the peak in 1929.
The issue isn’t just the terrifying situation in the Middle East, either. The U.S. economy is also slowing, the Federal Reserve just slashed interest rates, and we face a pivotal presidential election. Oh, and China, the world’s second-largest economy, is stumbling.
Yet the S&P 500 SPX index, which is the cornerstone of almost every reader’s 401(k), IRA and other retirement accounts, currently sells for a higher multiple of average earnings than at almost any time in history.
The so-called cyclically adjusted or Shiller price-to-earnings ratio, named after Nobel Prize winner and Yale finance professor Robert Shiller, is currently 35. This ratio compares stock prices to the average corporate earnings of the past decade, adjusted for inflation. Shiller was awarded the Nobel Prize for economics for showing how it had been a powerful predictor of future investment returns.
The current ratio is higher than the peak in 1929 (when it hit 33), let alone the late 1960s (when it was just 22). Both proved terrible times for investors. Actually, on this measure, the S&P 500 has only been more expensive on two occasions before this summer: During the Greatest Bubble in History from 1998 to 2001, and during the post-COVID mania of 2021-22.
Both also proved bad times to be an investor.
Check out this chart from Mindful Advisory, a money-management firm in New Jersey. Using Shiller’s own data, it tracks all the monthly cyclically adjusted PE ratios since 1881 from the cheapest (bottom left) to the most expensive (top right).
As Shaggy used to say on Scooby-Doo: Yikes!
This isn’t an isolated indicator, either. Warren Buffett used to say his favorite measure was to compare the market value of all U.S. stocks to the U.S. annual gross domestic product.
By this, too, we are up in the clouds. Stocks are currently valued at 190% of U.S. GDP. That’s about twice the average since the 1970s.
Or consider the measure known as the Tobin’s Q, coined by economist James Tobin (another Nobel laureate), which compared the market value of U.S. stocks to the supposed cost of rebuilding all these companies’ assets from scratch. It, too, is at all-time record levels and about twice its historic average.
The usual riposte from Wall Street bulls goes along the lines of, “Bears have been saying that for years, and they’ve been wrong and missed out on massive gains.” They’re absolutely right. But their argument risks double-counting. On the one hand, the higher the stock market goes, the bigger its recent historic returns. Yet on the other, by definition, the higher it goes, the lower its future returns.
The argument also ignores risks as well as potential returns.
The problem for us ordinary investors isn’t that the S&P 500 is definitely going to collapse, or crash, or even that it will necessarily produce terrible returns over the next five or 10 years. It’s that, as the Bard of Broadway, Damon Runyon, once said, while the race isn’t always to the swift nor the battle to the strong, “that’s the way the smart money bets.”
How much do you want to bet on this asset class, at these odds?
Mark Cecchini, a certified financial planner in Lehigh Valley, Pa., summed up the situation pretty well in a recent tweet. The “recency bias right now is so strong that no one thinks about the lost decades of the S&P,” he wrote. “From 2000 to 2010, the annualized return of the S&P was -0.97% … Personally I’m not willing to bet the probability of achieving my family’s goals on 1 asset class dominated by 7 companies.”
·
recency bias right now is so strong that no one thinks about the lost decades of the S&P from 2000 to 2010, the annualized return of the S&P was -0.97% personally I’m not willing to bet the probability of achieving my family’s goals on 1 asset class dominated by 7 companies Show more
Copy link
No kidding.
Those seven companies — Apple AAPL , Amazon AMZN ,Microsoft MSFT , Nvidia NVDA , Google/Alphabet GOOGL GOOG, Facebook/Meta META , and Buffett’s Berkshire HathawayBRK.A BRK.B — account for about a third of the entire S&P 500 by value and, even crazier, about one-sixth of all the listed stocks in the world.
At these levels, the S&P 500 seems to have priced in little margin for risk at a time when risks seem even higher than usual. The chances that it will produce terrific returns from here over the next decade must logically be slimmer than they have been.
And they are probably slimmer than most investors think. Vanguard recently reported that U.S. investors’ expectations are now at their highest levels since it began surveying back in 2017. And the expectations are higher than even Vanguard’s own forecasts.
Ben Inker, the co-head of asset allocation at white-shoe Boston fund firm GMO, warns in a new research paper that “lost decades” for U.S. investors — long periods of about 10 years when you earn nothing — have been more common than we may think. Inker was writing not only about the stock market but about the so-called “balanced” or “60/40” portfolio, consisting of 60% in the S&P 500 and 40% in the U.S. bond market. Since 1900, Inker writes, “there have been six periods, averaging 11 years each, in which an investor in a 60/40 portfolio would have either broken even relative to inflation or, even worse, lost money in real terms.”
Everyone will have their own thoughts. Many investors, buoyed by years of a booming S&P 500 and this year’s rally in bonds, will ignore the warnings and just stick with 60/40. Institutions will pin their faith in “alternatives,” typically meaning high-fee entities like hedge funds and private equity. (Those are brilliant wealth creators for the people who run them. Not so much for their investors.)
Doug Ramsey at investment group Leuthold Group models an “All Asset No Authority” portfolio that has done as well as 60/40 since the early 1970s, but with no lost decades: It includes U.S. small-caps IWM, developed international stocks VEA, gold SGOL, commodities GSG and REITs VNQ, as well as the S&P 500 SPY and 10-year U.S. Treasury bonds IEF.
My own preferences include U.S. and international small-company stocks, which seem to have missed out on the S&P 500 mania; resource stocks, which seem to march to a different beat to the rest of the market; and inflation-protected Treasury bonds.
Make of that what you will. It’s your money and your choice. If the S&P 500 goes vertical from here, you can have a good laugh at my expense.
I don’t mind interesting times. I just expect stocks to be cheaper than they are now when I encounter them.
summary from chatgpt:
| • | The S&P 500 is currently valued at historically high levels, surpassing the peak before the 1929 crash, with a cyclically adjusted price-to-earnings (Shiller P/E) ratio of 35. | |
|---|---|---|
| • | This high valuation raises concerns as previous instances of high ratios, such as 1929, 1998-2001, and 2021-2022, resulted in poor long-term returns for investors. | |
| • | Other indicators like Warren Buffett’s market value-to-GDP ratio (currently at 190%) and Tobin’s Q also show the market is highly overvalued, double their historical averages. | |
| • | Recency bias has made investors overly confident, despite past periods, such as 2000-2010, when the S&P 500 had negative annualized returns (-0.97%). | |
| • | The S&P 500 is dominated by seven large companies (Apple, Amazon, Microsoft, Nvidia, Google/Alphabet, Meta, and Berkshire Hathaway), representing a third of the index and one-sixth of all global stocks. | |
| • | Vanguard reports investor expectations are currently at their highest levels since 2017, even higher than Vanguard’s forecasts. | |
| • | Historically, there have been several “lost decades” where portfolios, including the standard 60/40 stock-bond mix, failed to keep up with inflation or lost money in real terms. | |
| • | Alternatives like small-cap stocks, resource stocks, and inflation-protected Treasury bonds may offer better opportunities for diversification and risk management. |
1 Like
I’m not selling anything but I am buying BND for the near term, I have been meaning to ramp up to 20% in stable-ish assets.
1 Like
It will be interesting if we see a decade of stagnant markets. We’ve had a decade of people getting used to - checking - according to the S&P 500, +12.8% returns on average each year.
We have people claiming the economy is terrible with DJIA up +26.4% 12MTD. Will be interesting to see what happens when that’s 1% or -3% for several years. It feels like it’s no longer “acceptable” for a President to have even average growth.
Isn’t the problem with using the DJIA to prognosticate on the economy is that the bulk of the gains are from a small portion of the index?
I’m not worried about which index is referenced 
S&P tops 5,800 for the first time.
1 Like
Bad news for Harris
2 Likes
It’s basically just more inflation if you think about it.
4 Likes
Uber +10.8%
Lyft +9.6%
Tesla -8.8%
The stock market does not represent the whole economy, regardless of what index you use. One reason for that is that an enormous number of businesses are privately held.
The only valid criticism of today’s economy is that some prices have really stretched affordability for most people, most particularly in housing and vehicles. The ability of the lower middle class to afford a home purchase or a new vehicle is really not there. Even the average middle class really needs to stretch to afford these things.
That’s not to say that I favor any of recent proposals to subsidize these purchases. I think that part of the reason these prices have gotten so high is the willingness of government and lenders to extend subsidies and ill-advised loans, propping up prices.
I did a quick comparison of now vs when I graduated:
House (same SF, same zip) 350k vs 200k
Car (small 4wd truck) 42k vs 24k
EL Acturial salary 85k vs 50k
Interest rates are about the same.
Inflation messes with people’s expectaions, but I don’t think things are really less affordable today relative to incomes.
Cars and houses have grown over those years, but I think that is mostly the preferences of boomers driving that relative to their parents generation.
1 Like
House prices are the main problem.
Renting gives people less long-term security vs buying, and this is compounded by not being able to build wealth via their house equity.
People in the most recent generations “feel” less succesful vs the previous generations because of that driver.
There is no real way to fix this problem in the short-term so we are likely to have to deal with very volatile politics for the next five years.
Just checked the the current rent on the place I moved to when I graduated. 1200 now vs 700 then.
I don’t see much from my new grad life that is less affordable now.
Junk food (including fast food) seems like the biggest outlier.
1 Like
I doubt the 10¢ packs of instant ramen from my college days, and $2 slices of cheese pizza when I wanted to splurge are quite as cheap anymore.
That’s true. The 35 cent package of Ramen is in the outliers i mentioned.
Well a slice of pizza at the Costco cafe is, I believe, still $1.99. 
(But yeah, most food is way more expensive.)
1 Like
I’m wondering if grocery store food in general (as opposed to dining out) meets the criteria for a Giffen good?
As it gets more expensive you buy more of it.
You have to eat, you’d prefer to go out, but as your food budget faces more and more pressure you can go out less and less. Which means that you’re buying even more groceries.
Don’t know about overall, but I was reading an article last week that the US’s major French fry supplier is looking at layoffs because people are dining out less (McDonald’s is one of their clients, but they have many others), making meals at home more, and people are not nearly as likely to make fries at home as they are to eat them out.
1 Like
I’ve been backing off fries because I’m getting to an age where my doctor is starting to talk to me about cholesterol.
1 Like