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The counterintuitive truth about stock market valuations

edited November 2020 in Other Investing
Just something for those of us who do year-end portfolio reviews to consider..... valuations alone are no reason to avoid or dump stocks. And they’ve historically revealed almost nothing about what stocks do in the next 12 months.

Indeed, much of the gains you see in the stock market have been achieved while valuations appeared expensive.


  • edited November 2020
    Thanks! I rebalance in early January, always. Not always with the same goal in mind, now, in retirement. 80 high, 71 low temp in Kaneohe today. I was at the beach in Kailua yesterday. Nice, though quite breezy. But you don't feel any breeze in the water! Water temp was 80, too.

  • Rich valuations don't matter.... until they do. Markets correct, and this one will as well. For now, the bravado continues. We are waiting on another stimulus injection to keep the party going. Earnings mean nothing these days because the market is assuming a snap-back in 2021. That assumption may turn out to be folly.
  • Yes, if I follow what's being asserted, reversion to the mean can and has in the past been very much delayed. Another way to say it is with the term, a "frothy market?"
  • edited November 2020
    Crash - Yes, reversion to the mean can take a really long time. In 1998, markets were screaming higher as we watched the bubble grow more and more (very frothy). In 1999, the markets marched even higher and the party continued (before reality finally hit in 2000).

    So 2021 may well hold a solid year of market returns. But I feel like I've seen this movie before.
  • 'the market can fail to revert longer than you can stay solvent' tm
  • +2.
    Valuations, PE, PE10, inverted yield, the economy, deficit, "experts" predictions and even earnings do not have a high correlation to what stocks may do for months and sometimes years to come.

  • Thanks for posting - excellent article.

    "The socialization of debt by the Fed is fundamentally reshaping how the quote 'free market' system works," Scott Minerd, CIO at Guggenheim Partners, told Axios last month.
  • Good thread!
  • "I made my money selling too soon" Attributed to Bernard Baruch. I haven't run it down myself.
  • edited December 2020
    "Many Americans are still hurting. Giving them the help they need could have greater value for the economy — and the country — than the Dow hitting new heights."
    ...Yet, here's an additional thought: The one typing these words is a socialist, but even I realize (sigh) that capitalism is the only game in town. People must be educated and have the fact drummed into them, that capitalism is the only game in town, in the USA. By definition, capitalism is inequitable. There are winners and there are losers. Because the playing field isn't level. Thus the need for regulations. But regulations with TEETH, not loopholes. So, "winners" and "losers" don't have to be so very far apart, as is the case today. The income inequality in this country today hasn't been so crazy nuts since the Gilded Age, the age of the Robber Barons. JP Morgan. Jay Gould. Rockefeller, Carnegie and all the rest of them.

    Equality of opportunity is essential. Equality of OUTCOMES is self-sabotage, I think, in societal terms. But then, defining your terms then becomes necessary. And there's a huge difference between what's legal and what's ethical. Our common humanity demands that they not be so utterly divorced from each other, as is the case today.

    ...So, years from now, someone with 12 million dollars can feel satisfied, but at the lower end of the income scale, that guy need not feel like he's been left with the shit-end of the stick. If students truly LEARN how to not just save, but to INVEST, and if they are taught not to do crazy stuff with their money that they don't even understand, then they will be much better off than the mass of people today.
  • Good morning Crash. Well put ! +1
    Stay safe, Derf
  • MJG
    edited December 2020
    Hi Guys,

    The stock market reflects public sentiment which is rarely neutral. We are typically either optimistic or pessimistic. With few exceptions we are optimistic far more often then pessimistic. Thank goodness for that human characteristic. Being optimistic wins which is needed for progress and well being. It’s why we get up each morning with goals to satisfy.

    Best wishes to all.
  • edited December 2020

    >> By definition, capitalism is inequitable. There are winners and there are losers. Because the playing field isn't level. Thus the need for regulations. [etc.] ...

    Huh? A lot of thoughts uselessly jumbled up here. Regulations have other purposes too.
  • David Crash is saying he's the socialist, as ISTR from his earlier posts. GOPers always argue that Dems want not just equality of opportunities but equality of outcomes as well. I'm guessing that Marxism/Leninism argued for equality of outcomes and the GOP loves to pin that label on Dems.
  • d'oh, my bad reading, will edit, tyvm
  • Marx was much too smart and subtle for that, but it is widely misunderstood, in any number of ways, yes
  • I wrote a reply which disappeared? I love technology. About as much as I LOVE SHOPPING!
  • Bumped into this article on Bogleheads.
    See also, any of Dr Hussman’s stuff. —.
  • edited December 2020
    John Hussman's market forecasts were consistently very wrong over the past decade.
    Investors should just ignore his prognostications. Link
  • Not sure I should trust since it refers to 'Dartmouth University', but good for a smile.
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