Market Valuations Don't Matter... Until They Do

Authored by Lance Roberts via RealInvestmentAdvice.com,

One of the hallmarks of very late-stage bull market cycles is the inevitable bashing of long-term market valuation metrics. In the late 90s, if you were buying shares of Berkshire Hathaway, it was mocked as “driving Dad’s old Pontiac.” In 2007, valuation metrics were dismissed because the markets were flush with liquidity, low interest rates, and “Subprime was contained.”

“Valuation is the capstone of proximate causes for a market top, and the one most indicative of the potential magnitude of any subsequent selloff. It’s well known that valuations are high for the US market, but I thought I’d update my aggregate indicator, which combines the main measures of long-term stock-market worth. It previously peaked in April, but has just made a new all-time high this month. Not a welcome sign if you’re a long-term bull.” – Simon White, Bloomberg




Of course, just as we have seen so many times, we again see repeated arguments about why “this time is different.” For some, it is the belief that the Fed will bail out markets if something goes wrong. For others, “Artificial Intelligence” and “Cryptocurrencies” are a new paradigm of investment returns. Of course, it is hard to blame investors for feeling this way, given the market’s outsized gains over the last 15 years.

Regardless of the reasoning, there is little argument that current trailing market valuations are elevated.

However, we need to understand two crucial points about valuations.

Market valuations are not a catalyst for mean reversions, and;
They are a terrible market timing tool.

Furthermore, investors often overlook the most essential aspects of valuations.

Valuations are excellent predictors of return on 10 and 20-year periods, and;
They are the fuel for mean-reverting events.

Critics argue that valuations have been high for quite some time, and a market reversion hasn’t occurred. However, to our point above, valuation models are not “market timing indicators.” The vast majority of analysts assume that if a measure of valuation (P/E, P/S, P/B, etc.) reaches some specific level, it means that:

The market is about to crash, and;
Investors should be in 100% cash.

This is incorrect.

Market valuation measures are just that—a measure of current valuation. Moreover, market valuations are a much better measure of “investor psychology” and a manifestation of the “greater fool theory.” This is why a high correlation exists between one-year trailing valuations and consumer confidence in higher stock prices.

https://www.zerohedge.com/mark...matter-until-they-do

Currently, mine are doing quite well.

As is mine.

I consolidated my 401k, an IRA and an annuity into a single IRA at Fidelity.
It was a good decision, since I got professional management out of it.

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Originally posted by WaterburyBob:
As is mine.

I consolidated my 401k, an IRA and an annuity into a single IRA at Fidelity.
It was a good decision, since I got professional management out of it.

So far nobody can outperform what I am doing on my own so I have not let anyone else manage my money.

We are hitting ATHs and 52wk highs. I'm doing great, but nervous. I've got a significant amount of cash to buy dips if they occur and to lock in outsized gains. Still 80% stock.

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Originally posted by Skins2881:
We are hitting ATHs and 52wk highs. I'm doing great, but nervous. I've got a significant amount of cash to buy dips if they occur and to lock in outsized gains.

Same here... the above chart should make anyone who remembers March of 2000 a bit nervous.

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Originally posted by mrvmax:

quote:

Originally posted by WaterburyBob:
As is mine.

I consolidated my 401k, an IRA and an annuity into a single IRA at Fidelity.
It was a good decision, since I got professional management out of it.

So far nobody can outperform what I am doing on my own so I have not let anyone else manage my money.

I don't have the knowledge to manage it as well as they can.

quote:

Originally posted by mrvmax:

quote:

Originally posted by WaterburyBob:
As is mine.

I consolidated my 401k, an IRA and an annuity into a single IRA at Fidelity.
It was a good decision, since I got professional management out of it.

So far nobody can outperform what I am doing on my own so I have not let anyone else manage my money.

You care to share what you are doing? I'm trying to weight options for retirement accounts, general savings/investment account, and educational savings account for my kids.

quote:

Originally posted by Skins2881:
We are hitting ATHs and 52wk highs. I'm doing great, but nervous. I've got a significant amount of cash to buy dips if they occur and to lock in outsized gains. Still 80% stock.

Weren’t you in a full blown meltdown over the stock market just a few months ago?

Not so much the stock market, but the stupid tariffs. I guess the stock market too. Losing $150k in a week will do that to you though.

I still think the tariff policy is stupid. We should be doing free trade with our friends and focus our tariffs on China and/or retaliatory or protectionary only. I don't give two shits about a trade imbalance with Vietnam. Their GDP is like $4k per capita. We can section, tariff, embargo, kill their puppies, whatever. They will not be buying any accounting services or any other services we offer. They are poor they can't afford it. Bullying them won't make money appear.

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We should be doing free trade with our friends and focus our tariffs on China and/or retaliatory or protectionary only. I don't give two shits about a trade imbalance with Vietnam. Their GDP is like $4k per capita. We can section, tariff, embargo, kill their puppies, whatever. They will not be buying any accounting services or any other services we offer. They are poor they can't afford it. Bullying them won't make money appear.

Free trade is fair trade. If it's free trade on both sides. It we aren't allowed to sell into other markets due to protectionist trade practices, why should we allow them access to our markets?
In the long run, it just weakens our country.

Because look at their GDP, what are they going to buy from us? Advanced AI computing; accounting services; business consulting? There's only so much that $4+ GDP per capita can buy.

Even if they can't afford to buy our stuff there's a benefit to having good relationships and trade agreements with SE Asia. I could give two shits if we doubled our imports to Vietnam it wouldn't help us economically. Driving SE Asian countries closer to China will most certainly hurt us.

Our current policy is sticks for everyone and very few carrots, plus we are not providing the carrots to the right people.

Once again the focus our tariffs should be on China and/or retaliatory or protectionary basis only.

If France won't buy our chickens or corn due to tariffs, double those tariffs and apply them to a weak industry in France. I think our tariff policy should be aimed at those that have clear obstructions to trade, or are our geopolitical enemies.

Markets don't like uncertainty, we have introduced a great deal of uncertainty.

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Because look at their GDP, what are they going to buy from us? Advanced AI computing; accounting services; business consulting? There's only so much that $4+ GDP per capita can buy.

That's what we thought about China when Nixon opened up trade with China and then we granted them "most favored nation" status under Clinton.
They are still mostly a nation of peasants but over the last 50 years our desire for cheap, foreign made goods has hollowed out our own manufacturing base. It has weakened our country.

Tariffs aren’t just about business and making money though. Robust national security requires that we be able to make what we need to wage effective war here in this country. If that means that we have to pay more for certain items in this country and/or can’t let certain foreign industries drive all of our domestic manufacturing overseas then it’s a very worthy investment. We didn’t win WWII because we were tactically better or better trained, we won because we outmanufactured the enemy by a huge margin. I'm not saying we have to maintain an enormous excess capacity here, but we need to have a strong enough foundation that we can ramp up production when we need it.

quote:

Originally posted by Skins2881:
Not so much the stock market, but the stupid tariffs. I guess the stock market too. Losing $150k in a week will do that to you though.

I still think the tariff policy is stupid. We should be doing free trade with our friends and focus our tariffs on China and/or retaliatory or protectionary only. I don't give two shits about a trade imbalance with Vietnam. Their GDP is like $4k per capita. We can section, tariff, embargo, kill their puppies, whatever. They will not be buying any accounting services or any other services we offer. They are poor they can't afford it. Bullying them won't make money appear.

The only way you lost $150k is if you stupidly sold off at that point. How much are you up now?

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Originally posted by SIG228:


The only way you lost $150k is if you stupidly sold off at that point. How much are you up now?

Not realized. I don't feel like calculating across all accounts, but my largest account, which is probably a good analog for entire portfolio is up 18.07% for the year. Even after liberation day market reaction.

Jesse, that's very good. Better than most.
My only point to posting the above article: "Market Valuations Don't Matter... Until They Do" is that valuations appear to be getting stretched. Do with that what you will.

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Originally posted by cooger:

quote:

Originally posted by mrvmax:

quote:

Originally posted by WaterburyBob:
As is mine.

I consolidated my 401k, an IRA and an annuity into a single IRA at Fidelity.
It was a good decision, since I got professional management out of it.

So far nobody can outperform what I am doing on my own so I have not let anyone else manage my money.

You care to share what you are doing? I'm trying to weight options for retirement accounts, general savings/investment account, and educational savings account for my kids.

I started learning more about it through YouTube and substack - I should have done that years ago but age crept up faster than I imagined. I mainly invest in undervalued companies. I did abnormally well during covid and made a killing off oil and uranium stocks. Those opportunities don't come around often. I thibk it was Buffet who said buy when others are selling and sell when others are buying. But doing that blindly is not wise.

I try to get advice from others who have done well and are more knowledgeable. I had one acquaintance give me his advice on how he became a multi millionaire through his 401k. He invested consistently over time and took advantage of compound interest. No fancy plans, just consistent investing over time. He utilized Vanguard funds.

I do pay for info offered by people too (but I manage my own money). I'd rather pay them than spend my own time researching companies. You'd be surprised at how much info is out there. For some its easier to pay others, but I'm beating the average so the time I've invested in learning has paid off and worthwhile. The less I pay others gives me more for myself.

One more thing, ensure you have a platform that gives you plenty of options for investing. My regular work 401k plans didn't so I rolled over into ones that did. I now have Interactive Brokers, Vanguard and Fidelity. I also have some in real estate through Fundrise.

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Originally posted by chellim1:
Jesse, that's very good. Better than most.
My only point to posting the above article: "Market Valuations Don't Matter... Until They Do" is that valuations appear to be getting stretched. Do with that what you will.

This is my whole fear. I've done great the last year. Many stocks are at ATHs and it's hard to look at those returns and lock them in. The P/E multiples make me nauseous looking at them, they fly in the face of history.

I love hearing people say I'm 100% or 80% cash. How does one end up that way? I can do it in my work account or my Roth, but my normal brokerage account? I have many things that are up over 100%. I've already realized ~25k in profit that's $3,750 in taxes (actually slightly more because some was short term). We are talking 6-12 months salary to cover the tax bill.

What I have done is sell winners that have high P/E ratios; targeting dividend paying value stocks; distressed stocks; and recently long term corp bonds. My hopes are that by moving *some to less risky (overvalued) stocks I can offset the losses that are around the corner at some point.

My other fear is I do go too safe and miss out then I will miss out on continuing growth. What a delicate tightrope to navigate.

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How does one end up that way? I can do it in my work account or my Roth, but my normal brokerage account?

A Roth IRA is God's gift to mankind. At least our tax code's gift. I'm trading the heck out of it. Up this year by a lot.
My other accounts, where I can't trade much, are doing a respectable 13-15%, which is not quite as good as yours.