Market Valuation and the Next Downturn

What’s your sense on market valuation? Does it seem overpriced? Any predictions on when this up trend will take a turn. Explain your rationale.

This uptrend in the US was manufactured by monetary stimulus and it will take a turn probably a year after borrowing rates rise significantly. Demand for US stocks (even ex-M&A) has been driven by corporations.

Well when do you think borrowing rates will rise significantly?

It’s impossible to call market peaks and troughs in advance, but risk assets do seem expensive right now. Time to be cautious I think.

Somewhere between when the Fed begins raising rates and when it raises them by 300 bps.

As brain_wash said, the multiple expansion is mainly due to monetary policy and will last in Europe even longer than in the US. As long as there are still enough pessimists in the market who are not fully invested in equities, the party will go on.

As brain_wash said, the multiple expansion is mainly due to monetary policy and will last in Europe even longer than in the US. As long as there are still enough pessimists in the market who are not fully invested in equities, the party will go on.


I’m starting to think never.

Not that it means anything, but the last two times that a 2 term president was leaving, the economy tanked big time during election year.

i mean the whole mantra right now is buy the downside. and we cant even get a 5% drop. WTF!

US equities, defined as the S&P 500, are fairly valued. Small cap may be overvalued at the moment, as with several sectors, but overall equities are near fair value. The market may rally or fall for various reasons, but market multiples do not suggest any sell off is necessary.

Equities generate the majority of their returns during periods of supportive monetary policy, which is coming to an end in the US but is continuing in Europe. I think the low interest rates in Europe, driven by a lack of inflation, will help keep long term US rates low as well. The lack of extraordinary US growth will allow the fed to avoid any big moves, so interest rates overall should remain subdued. Watch interest rates and inflation, if either start to rise sharply, then we may see a big pullback in equities.

only necessary for a 50-60% drop. run-of-the-mill drops of 20-40% can happen without irrational exuberance.

The basic principle is “It’s always time to buy!”

I think US equities are very expensive from a bottom up perspective. I am afraid of this stock market and so is a lot of the smart money I know. The term circulating is “zero gravity market” and I think that sums it all up nicely.

love this guy

Can someone (bchad) lay out the case for why they believe US equities are so incredibly overvalued? We’ve been in a steady upward market for an incredibly long time, so I can appreciate the idea that we are due for a correction, but I’m talking fundamentals. I don’t see it and would love for someone to show me how the S&P is overvalued at the moment.

The usual arguments are that profit margins are a cyclical high (higher than they’ve ever been) and that valuations are only conceivably fair if you assume that that they will never mean revert again. Shiller CAPE and Tobin-Q ratios are also still way above historical means (levels that before 2000 usually indicated a correction imminent, but which seem not to have been, post-2000).

Then there are things like headwinds… to what extent are valuations pricing in expected interest rate increases and/or inflation (i.e. the idea that interest rates will either be raised by the Fed, or they won’t, but inflation will start to creep up instead). The alternative to that is to say that interest rates will stay low because we are facing deflation (so the Fed won’t want to raise rates, and there’s no inflationary pressure either) - but deflation generally is bad for stocks too, because top-lines contract, or grow really slowly in deflationary situations…

There is a solid argument that margins are not at a cyclical high and are instead in more of a ‘new normal’ range. Healthcare and IT are becoming a larger share of the S&P and those two industries have seen their tax rates fall substantially over the past 15 years by taking an increasing share of their revenue from foreign countries. IT has seen the biggest improvement, with overall tax rates falling from 28% to 10% since 2003. I’m not saying that margins can’t come down, but I also can’t say that they won’t increase. I just think that we can’t expect them to mean revert to previous levels. It will be interesting to see what the new range will be.

The shiller CAPE is useless for the next 10 years. I won’t try to start that argument here again, but in a thread a few weeks ago (Idea generation/market commentary) I explained my argument. We should collectively be spreading the word to anyone that refrences the CAPE that they are using a meaningless ratio and will draw false conclusions.

Inflation and interest rates are indeed the key. This is what I have my eye on the most these days, it’ll be a wild ride if a large movement occurs in either direction. If both stay relatively subdued, that’s a green light for equities as they perform exceptionally well during periods of low inflation/low interest rate environments.

The thing that can’t stay (at least the way I see it) is the lack of growth in compensation for the average worker. That will put downward pressure on the new normal profit margins