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In 12/31/2010 GMO 7 year forecasted US large cap would make 0.4% + 2.5% inflation = 2.9%. The SPY made over 14% annually (link). Bogle was wrong about the SPY too and Arnott was very wrong and why PAUIX lagged badly. Many experts were wrong in the last 10 years.
Agreed their forecasts have been inaccurate of late, but I have been around long enough to know that wasn’t always the case, particularly in the post 1999 era when GMO’s predictions were spot on. It comes down to that terribly difficult question: When will valuations matter again? Or are we to presume the next ten years or in this case seven years will precisely mirror the previous seven? What is interesting is leading into the 2008 crash everything pretty much was overvalued. Now like in 1999 there is a real spread in valuations between one part of the global market and another. For those who believe valuations still matter and in the notion of “reversion to the mean” that presents some interesting arbitrage opportunities. The question that folks like Arnott and GMO always struggle with is they don’t know what will trigger the reversion. It has to be something major. Overvaluation alone is never the trigger.
"The question that folks like Arnott and GMO always struggle with is they don’t know what will trigger the reversion. It has to be something major. Overvaluation alone is never the trigger."
And the "something major" trigger in 1987 was... ?
"According to Shiller, the most common responses were related to a general mindset of investors at the time: a "gut feeling" of an impending crash, perhaps brought on by "too much indebtedness".
Currently, Old_Skeet has about 7% of his equity allocation in emerging markets; and, that is about the "max" for me as I do not wish to get "grounded." Ha ... ha!
The era of cheap debt and/or helicopter money from central banks tends to render predictions of anything less than further equity gains to be moot, I daresay.
That helicopter money has to go somewhere. Me thinks ... stocks! And, with this, stock valuations soar! Along with expansion of P/E Ratios. Seems that is what has taken place this year ... and, most likely most of next (2020).
Despite high volatility at times, 1987 produced positive total returns in the S&P 500. The losers are the ones who sold and never got back in.
Agreed. And it's probably the same for 2000 and 2009. I know a few people who got seriously burned in 2009 and one or two still haven't recovered the confidence to return to the market. They will probably buy in again at the top....
This "reversion to the mean" concept is interesting. I think it has some major limitations today. And isn't "the mean" always fluid, always changing? What is "the mean" in today's world? As Old Skeet mentioned, P/E ratios are constantly expanding. I see no problem with that. I think value sectors will struggle again this coming decade because growth can be achieved very quickly and easily with the application of new technologies. You could wait 5 or 10 years for the reversion to the mean. Or it may never come at all.
@davidrmoran Interestingly, GMO's Grantham made one of the most plausible albeit depressing explanations for such a permanent shift, which involves increased monopolization and corporate influence in the political sector: csinvesting.org/wp-content/uploads/2017/05/This-time-seems-very-very-different-Grantham.pdf Yet even if one believes that influence and monopolization will never wane--people once thought the same about companies in the Gilded Age--it seems mistaken in my view to assume those dominant corporations will always be U.S. ones and that the remarkable valuation spread between large U.S. companies and large ones in countries like China or Mexico doesn't matter.
Love the terminology. I do enjoy combining gaming with investing on those rare occasions where the deck is clearly stacked in my favor. Get in. Get out. Pocket what you can over a few months (or possibly years) before the market wakes up to the obvious mispricing. Works best with sectors or specialty funds. A fund that’s down 40% in a single year or 30% a year over 3 years is generally worth placing such a bet on. However, scanning TRP’s 150 or so funds, I can see only one fund that’s even negative for 2019. That’s their Dynamic Global Bond fund (RPIEX) - off only about 1%. And looking at a the 3-year chart, all I see there is PRNEX - off slightly - which I already own.
Price isn’t the whole universe. But they have enough funds that I can usually spot major trends there. Nothing worth laying money on the table for IMO. I realize the type of investor Lewis is addressing is the one who exists somewhere in between the extremes of short-term speculator and long-term buy and hold investor. I like to think that that kind of gradual shift in/out of different areas based on relative valuations is something a good manager of allocation funds normally does. None of us can match the depth and breath of market knowledge Price’s global network of analysts is imbued with. (And many other managers as well) So, other than liking RPGAX a lot because the managers have some discretion in underweighting / overweighting different market components, I won’t be throwing money at emerging markets.
@hank Actually, since you mention T. Rowe Price, I would think PRIJX would be interesting for this specific situation: https://morningstar.com/funds/xnas/prijx/quote If you go to the fund's Portfolio page: https://morningstar.com/funds/xnas/prijx/portfolio you can see its portfolio average price-earning ratio 9.84; price-sales, 0.91; price-cash, 3.6 and a dividend yield of 4.38%. Now compare that to the S&P 500: https://morningstar.com/funds/xnas/vfinx/portfolio p-e, 19.4; p-s, 2.3; p-c, 9.9; div yield, 1.9%. Meanwhile, growth metrics are very close for the S&P versus this fund, indicating little advantage for buying U.S. in that regard. So even if one just says well U.S. companies are better and deserve higher valuations, the question is how much better? Are they twice as good, three times as good? Because the relative valuations indicate that's what the market currently believes.
@LB, is not another part of the arg that equity alternatives like bonds and RE are 'permanently' (whatever that might mean) shifted to lower than in the past ?
@davidrmoran That I have a harder time believing as inflation tends to be outside of corporate and government control at some points. There is a belief though that low rates will be here for a while, yes, but "permanent?" like you said, with quotes only.
I think though this discussion is rather abstract so let's put some concrete details beneath it as to what is really underlying the permanently elevated U.S. large stock valuation scenario: 1. Does one believe that Apple, Amazon, Google, Microsoft, Facebook, and Netflix will dominate the world until the end of time or will either governments or competitors, perhaps foreign competitors such as say Samsung, Ten Cent or Alibaba eventually begin to erode their marketshare? They are today's bellwethers. If they slip, you can almost be certain the U.S. market crashes. It seems even under the current ultra-rightwing administration there has been some pushback against their monopolistic tendencies. 2. Do low interest rates last forever? Last time they inched up, market cracked? 3. Do low corporate taxes last forever? 4. Does U.S. labor remain powerless and declining forever, having no bargaining power or pricing power on wages? 5. Do commodity prices stay low forever? 6. Corrolary to 4 and 5: Does inflation stay low forever? 7. Do merger-friendly, monopolistic, anti-competitive anti-labor right-wing policies remain in place forever? 8. Is there some accounting scandal at any of the aforementioned bellwethers about to break? 9. Is a war--a real war not the virtual one already being waged--about to occur? 10. Do the nationalistic trends we've seen throughout the globe ultimately mature into full-blown fascism in the U.S. or in major trading partners? 11. Will climate change and the policies necessary to keep it from becoming even a greater ecological catastrophe than it already is restrict business growth?
Any of the above could throw the "permanently elevated" stats askew.
I started to answer the above questions. But tossing in a term like forever really makes them undebatable. Infinity is a very long time. I’m told by scientists that given enough time, virtually anything can and will occur.
I am deeply concerned about #10. Wish this was a poli-sci or sociology class so we could explore that one. FWIW, my vague recollection from doing some Masters work in history back in the 70s is that Hitler, after coming to power, boosted the German economy for a number of years, through huge infrastructure spending and arms buildup. The frightening thing to me is that that was during the Depression and an outgrowth of it. Seems to be different reasons at work for the regression today (speaking more of Europe). Immigration looms large among people’s worries worldwide.
hank said "Immigration looms large among people’s worries worldwide."
No doubt. It's not easy finding a safe haven these days where you can just work and live without fearing for your life. Reminds me of farmers and fisherman I met in Vietnam.
The thing is, none of these concerns may manifiest themselves imminently, but low valuations combined with a strong balance sheet are supposed to act as a "margin of safety" in classic value analysis. The higher valuations get and the more leveraged companies are, the less insulated they are from anything negative occurring. They are to use a cliche "priced for perfection." Anything less is problematic. Right now the corporate leverage situation isn't great either, another risk I neglected to mention.
“anything negative occurring” strikes me as supreme understatement when running down that list of possibilities Lewis tossed out - some quite dire.
But I agree with Lewis’ posture here in general. I don’t have the depth of knowledge to explain why domestic markets are overvalued (and so hesitate to weigh in) - but I believe them to be. I’m certainly not alone in that belief. And that is precisely why some EMs appear so attractive compared to the U.S. The problem resides in that time-worn chiche: “When the U.S. economy sneezes .....”. If the S&P takes a sudden 25% haircut, EM’s will follow, likely loosing even more. And that will be the time to buy EM.
When the U.S. economy sneezes .....”. If the S&P takes a sudden 25% haircut, EM’s will follow, likely loosing even more.
That is a fair point, but much depends on the nature of the cold of flue so to speak on whether or not it's contagious and to what degree. During the 2000-2002 crash, emerging market stocks held up better than U.S. ones, and emerging market value ones especially so. That was a tech sector valuation/corruption--remember Worldcom/Enron? Fun times!--driven crash, not a macro global financial crisis like the 2008 one.
I oversimplified. EMs today are much different than 30 years ago when I was first immersed in the vocabulary of investing. Some, like China, are highly industrialized economies, global leaders in technology, and growing military powers. Much different from 30 years ago. EM economies differ greatly. Those rich in natural resources might better survive a global downtrend if the price of energy and precious metals remained high. I’ve noticed increased civil strife / unrest in some EMs - notably Latin America. That, coupled with often endemic government corruption works against investors.
Re: 2000. That was an unusual crash. Tech had been hyped out of sight. NADAQ toppled and led the other indexes (Dow, S&P) on the way down, even though those weren’t nearly as overvalued. I wasn’t aware EM held up better - but makes sense. It was well over a decade, I believe, before NASAQ ever regained its 5,000 level
Comments
Bogle was wrong about the SPY too and Arnott was very wrong and why PAUIX lagged badly.
Many experts were wrong in the last 10 years.
And the "something major" trigger in 1987 was... ?
"According to Shiller, the most common responses were related to a general mindset of investors at the time: a "gut feeling" of an impending crash, perhaps brought on by "too much indebtedness".
Hard to say, it seems.
The era of cheap debt and/or helicopter money from central banks tends to render predictions of anything less than further equity gains to be moot, I daresay.
This "reversion to the mean" concept is interesting. I think it has some major limitations today. And isn't "the mean" always fluid, always changing? What is "the mean" in today's world? As Old Skeet mentioned, P/E ratios are constantly expanding. I see no problem with that. I think value sectors will struggle again this coming decade because growth can be achieved very quickly and easily with the application of new technologies. You could wait 5 or 10 years for the reversion to the mean. Or it may never come at all.
Yet even if one believes that influence and monopolization will never wane--people once thought the same about companies in the Gilded Age--it seems mistaken in my view to assume those dominant corporations will always be U.S. ones and that the remarkable valuation spread between large U.S. companies and large ones in countries like China or Mexico doesn't matter.
(or possibly years) before the market wakes up to the obvious mispricing. Works best with sectors or specialty funds. A fund that’s down 40% in a single year or 30% a year over 3 years is generally worth placing such a bet on. However, scanning TRP’s 150 or so funds, I can see only one fund that’s even negative for 2019. That’s their Dynamic Global Bond fund (RPIEX) - off only about 1%. And looking at a the 3-year chart, all I see there is PRNEX - off slightly - which I already own.
Price isn’t the whole universe. But they have enough funds that I can usually spot major trends there. Nothing worth laying money on the table for IMO. I realize the type of investor Lewis is addressing is the one who exists somewhere in between the extremes of short-term speculator and long-term buy and hold investor. I like to think that that kind of gradual shift in/out of different areas based on relative valuations is something a good manager of allocation funds normally does. None of us can match the depth and breath of market knowledge Price’s global network of analysts is imbued with. (And many other managers as well) So, other than liking RPGAX a lot because the managers have some discretion in underweighting / overweighting different market components, I won’t be throwing money at emerging markets.
If you go to the fund's Portfolio page: https://morningstar.com/funds/xnas/prijx/portfolio
you can see its portfolio average price-earning ratio 9.84; price-sales, 0.91; price-cash, 3.6 and a dividend yield of 4.38%. Now compare that to the S&P 500: https://morningstar.com/funds/xnas/vfinx/portfolio
p-e, 19.4; p-s, 2.3; p-c, 9.9; div yield, 1.9%.
Meanwhile, growth metrics are very close for the S&P versus this fund, indicating little advantage for buying U.S. in that regard. So even if one just says well U.S. companies are better and deserve higher valuations, the question is how much better? Are they twice as good, three times as good? Because the relative valuations indicate that's what the market currently believes.
I think though this discussion is rather abstract so let's put some concrete details beneath it as to what is really underlying the permanently elevated U.S. large stock valuation scenario:
1. Does one believe that Apple, Amazon, Google, Microsoft, Facebook, and Netflix will dominate the world until the end of time or will either governments or competitors, perhaps foreign competitors such as say Samsung, Ten Cent or Alibaba eventually begin to erode their marketshare? They are today's bellwethers. If they slip, you can almost be certain the U.S. market crashes. It seems even under the current ultra-rightwing administration there has been some pushback against their monopolistic tendencies.
2. Do low interest rates last forever? Last time they inched up, market cracked?
3. Do low corporate taxes last forever?
4. Does U.S. labor remain powerless and declining forever, having no bargaining power or pricing power on wages?
5. Do commodity prices stay low forever?
6. Corrolary to 4 and 5: Does inflation stay low forever?
7. Do merger-friendly, monopolistic, anti-competitive anti-labor right-wing policies remain in place forever?
8. Is there some accounting scandal at any of the aforementioned bellwethers about to break?
9. Is a war--a real war not the virtual one already being waged--about to occur?
10. Do the nationalistic trends we've seen throughout the globe ultimately mature into full-blown fascism in the U.S. or in major trading partners?
11. Will climate change and the policies necessary to keep it from becoming even a greater ecological catastrophe than it already is restrict business growth?
Any of the above could throw the "permanently elevated" stats askew.
I am deeply concerned about #10. Wish this was a poli-sci or sociology class so we could explore that one. FWIW, my vague recollection from doing some Masters work in history back in the 70s is that Hitler, after coming to power, boosted the German economy for a number of years, through huge infrastructure spending and arms buildup. The frightening thing to me is that that was during the Depression and an outgrowth of it. Seems to be different reasons at work for the regression today (speaking more of Europe). Immigration looms large among people’s worries worldwide.
No doubt. It's not easy finding a safe haven these days where you can just work and live without fearing for your life. Reminds me of farmers and fisherman I met in Vietnam.
But I agree with Lewis’ posture here in general. I don’t have the depth of knowledge to explain why domestic markets are overvalued (and so hesitate to weigh in) - but I believe them to be. I’m certainly not alone in that belief. And that is precisely why some EMs appear so attractive compared to the U.S. The problem resides in that time-worn chiche: “When the U.S. economy sneezes .....”. If the S&P takes a sudden 25% haircut, EM’s will follow, likely loosing even more. And that will be the time to buy EM.
Re: 2000. That was an unusual crash. Tech had been hyped out of sight. NADAQ toppled and led the other indexes (Dow, S&P) on the way down, even though those weren’t nearly as overvalued. I wasn’t aware EM held up better - but makes sense. It was well over a decade, I believe, before NASAQ ever regained its 5,000 level