Was wondering how the AF community feels about the current market valuation. Seems like people are waiting for corrections, but the US economy feels solid with the strong energy boom, and all. Ditto for things happening in Tech in Silicon Valley. Of course, there’s the unemployment situation, but with firms turning in record profits, I feel 7% is the new normal.
7% was the old normal. If we’re in a secular bull market for stocks - which many believe we are - an annualized 7% is way low.
I’ve read every economic/market outlook available…seriously ever.damn.one. What’s scary is they all say the exact same thing. “Domestic equity should produce high single digit returns in 2014.” I don’t like it when everyone agrees, but ironically enough, I also agree. Aside from some major shock - war, terrorism, ebola outbreak in Texas (watch yourself Greenie) - I think this market continues to melt up.
In the near term, I agree with what Raymond James is putting out about being 80% invested at the moment and waiting for a pullback/correction to go all in. Just as everyone agrees stocks are going up this year, they also agree volatility should rise as well.
“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
William Bernstein - The Intelligent Asset Allocator
Full disclosure - 100% long in a diversified portfolio.
One has to wonder in a world where developed economies can barely squeak out 2% real GDP growth, how 10%+ sustained equity returns are possible, absent rampant inflation.
US GDP estimate is 3.4-3.6% this year. Every outlook I read talked about last year’s market being ramped up by multiple expansion on the pretense of stronger earning and higher GDP this year. Should earning (or, rather, their forecasts) fall short and/or GDP disappoint, we’re probably looking at a flat year for equities.
I’ve been wondering that too, but it hurts to feel stupid, quarter after quarter…
Real GDP forecasts have been biased high consistently for several years now, ever since 2008. The growth has never materialized (but don’t tell the equity markets).
“They” say the sequester and other fiscal roadblocks shaved off 1.5% from last year and this year we’re supposed to finally get that ramp up in Cap Ex spending we’ve been waiting for for five years.
Plus the added benefit of all that fracking has helped the current account deficit. That’ll add a little.
I often hear people making an argument that the market is overvalued relative to historic multiples and we are coming off of a 2013 bull run where the index was up 30%. I also understand the notion of mean reversion. However, I think what makes this rally different from others in the recent past is that we remain in an exceedingly low interest rate environment. The opportunity cost of not being in equities is simply too high. That has to be taken into account beyond traditional average multiples and stuff like that. I do look at stuff like GDP, employment reports, world political and economic unrest and so forth. However, there are many economists and wannabes out there that have opinions on the market, and many of them sound reasonable, but not all of them will be right.
Therefore, for me it’s a fool’s game to try to bet on the direction of the economy even though I know that sort of thing matters from a portfolio management perspective. Personally, I’ve come to the realization over time that what seems to matter most is the opportunity cost of one asset class versus the next. Outside of equities (and precious metals YTD), most other asset classes have not provided a good risk-adjusted return. Therefore, I continue to like equities but believe that the increased volatility and potential for a sideways market will mean that there is a greater likelihood of alpha becoming profits on both the long and short side.
That is the estimate used in the federal budget, right? The Obama estimate is higher than the Federal Reserve estimate and the median estimate of “economists”. They budgeted government spending based on this, and stocks went up the day that news hit Bloomberg (not necessarily related).
I more or less agree with Numi here. I still think we are in a “don’t fight the fed” bull market. If the taper continues as predicted, that means the economy is improving. If there are signs of weakening, and the pace of the taper slows, or they even hint at further stimulus, the last few years tell us the market will keep on roaring.
Really, until I think a rate hike is coming in the next 3 months or so, I’m long and strong. That takes me through 2014. Then I might go partially to cash just to see how the market handles it.
That’s the thing really… is the Fed now in the business of using its levers to keep the stock market growing at 10%? It’s kind of become a stealth manadate. Fed wants to taper faster, market flips, Fed backs off. It’s all about equity return stability, which is bizarre.
Not sure how linked GDP and market returns are in the medium term and even long-term. Those that believe in confidence and wealth effects argue that it’s the stock market that impacts the economy.
The stock market has reached a permanently high plateau.
- Former Trader, March 6th, 2014.
Grantham discusses this in some of his recent talks. Interesting stuff
Here is my view on domestic equities.
Since it seems like the overall U.S. economy is improving, the recent p/e multiple expansion seems justified. With continued economic growth along with higher earnings, extreme down-risks is limited; so, I don’t think we will see a cyclical bear market anytime soon.
In-addition, even though the market is reaching for growth, as shown by Facebook’s acquisition of Whatapp and Google’s march ever higher, the market punished prior growth stories such as Apple and Linkedin for slower growth, so we are clearly not in a manic bubble.
Down-side risks are embedded in the market though. We have just started to feel the effects of ending QE, the early endings of a slowdown in some emerging markets, potential credit problem in China, and some junky credit from QE. While these probably won’t stop domestic growth, they could put a limit on higher multiple expanson.
Overall, I suspect the market will continue higher or maybe range-bound and with more volatility. Buy on dips. For a long term investor, just keep on dollar cost averaging in. For safety in a 1-3yr time horizon (i.e savings for purchasing a home), I would stick with short duration bonds.