[quote=burghMan]One thing Piggington has done for me is to convince me that most useful investment analysis comes down to fundamental valuation measures. Rich’s chart on the real estate bubble tells the story in one simple, clear picture. During the bubble real estate was realy, really expensive and it inevitable that it would come back down.
I believe the stock market follows the same rules, and for that reason I’ve always taken an interest in the market’s measure of valuation. I check this chart regularly:
Based on the chart, I’ve been reluctant to go all-in on the stock market in the past ten years. I have about half of my longterm portfolio in equities, but just am just too wary about valuations to commit 100%.
My rough analysis is that the market is significantly overvalued:
– Historic mean is around 15
– It’s now above 30, double the mean
– We don’t really have any economic “revolution” like the late 1990s tech surge that would drive it even higher
– Interesting historic note: It was around 30 on black friday 1929
But there are possible arguments against overvaluation. It’s been above the historic mean since 1990, so maybe the longterm mean doesn’t mean much and the modern economy has changed some rules? Much of the late 1900s tech bubble was hype, but many of the innovations are now coming to practical fruition (e.g. self driving cars.) I’m reluctant to believe that “it is different this time”, but it has been different for a very long time.
So what I’m asking is a market timing question, which is something I know the “experts” say we should never try to do, but I cannot help but try and do it anyway. It seems to me like buying stocks today is much like buying real estate in 2002 or so. Not insanely expensive, but certainly expensive by historic data. Which means a big decline is a real possibility and upside is limited.
So what do you think? I am looking at the wrong chart or reading it wrong or missing something? How long can the bull market go on?[/quote]
CAPE is only one measurement of stock market valuation just like SAT test scores used in college admission. It has serious flaw – it fails to consider the interest rate. Early 80 CAPE can’t compared with current time CAPE due to 10% difference in interest rate. Vanguard uses a modified version of CAPE called fair-value CAPE and adjust for current interest rate. In Vanguard research, current U.S. stock market is still considered overvalued, but only slightly due to low interest rate. This is in sharp comparison with many other pure CAPE modelers: https://vanguardblog.com/2019/03/13/what-fed-projections-may-mean-for-longer-term-stock-returns/
Contrarian view is negative stock marker sentiment is bullish for stocks. For the last half year the sentiment was mostly bearish with all the recession talk. Wall street would love to propel the market higher when so much retail investor money has sidelined.
