It is an odd position because the P/E and Forward P/E are elevated but not extreme. The bigger warning signal for me is when I see people in public talking about stocks or having stock screens open and this happened almost four times in one week. For me that is basically the sign to risk manage.
> bigger warning signal for me is when I see people in public talking about stocks
Which is interesting "this time" because much of the issue may be due to historical and tax-quirk fullfilling index weighting. And the people invested nearly entirely in these indexes is kinda by definition the people who normally don't even look at their investments. "Irrational autopilot"?
It’s never different this time, this is embedded into human nature and people oscillate between fear and greed. That’s it. Not more complicated than that.
This is conjecture, but I'm fully expecting a correction, if not a recession. Fortune 500 has gone all-in on AI and set high expectations for increased efficiency. So far, that boost has not come, but Wall Street has been patient. But if you fast forward a few quarters, I wonder if investors will lose their patience and wonder why we're all still burning cash.
BTW, I'm long-term bullish on AI, I just think companies have gotten over their skis in the short-term.
what are ETFs and/or financial products that take this into consideration? what difference does it make in terms of volatility and/or expected returns to invest in something like SP500 or $VT compared to Shiller-PE-adjusted products? does this matter in the long-term, or better, when exactly is "long-term" long enough so that Shiller PE doesn't matter and one can just go with SP500/$VT without sleepless nights?
Just a reminder that a market crash isn't the only way the Shiller PE Ratio can return to "normal". It can go back down if earnings go up. Or if previous dips in earnings roll outside of the 10-year window used to calculate the ratio.
ETFs were first introduced in 1993. Ever since then their populairty is increasing. Nowadays everyone and his mom is pouring all their savings into ETFs. That's the main reason why the P/Es are at all time highs + of course of the current A.I. boom.
Is this posted to imply things are overvalued and due for correction?
If so there is one issue with that. It is more tax efficient to have lower earnings and disguise profit and reinvestment as R&D cost.
Tech companies can do this covertly due to the jack of all trade Software Engineering (and friends) roles that could be BAU or RD work.
When a metric becomes a target it ceases to become a good metric. But when an accounting metric causes you billions of dollars in tax, and you are mostly compensated in share price not earnings it becomes really skewed!
NASDAQ composite P/E was ~10 in the beginning of 1995. Between March 2000 and part of 2002, it was 150+. It took much time and pain until 2005 to stabilize at a new equilibrium of around 30 where it's bounced around between 15 - 50 where large, sudden increases tend to portend a market contraction of unknowable depth.
I also wonder about the impact of the growing fraction of the economy no longer subject to gamified speculation held by private equity which is now around $3.5T AUM, but comes with other downsides because they do not seem to care about the longevity or goodwill of businesses they own and seek unsustainable maximum resource extraction rather than predictable steadiness.
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[ 3.6 ms ] story [ 46.9 ms ] threadWhich is interesting "this time" because much of the issue may be due to historical and tax-quirk fullfilling index weighting. And the people invested nearly entirely in these indexes is kinda by definition the people who normally don't even look at their investments. "Irrational autopilot"?
BTW, I'm long-term bullish on AI, I just think companies have gotten over their skis in the short-term.
If you look at the P/E of mid and small cap companies, their valuations look much more sane: https://x.com/sonalibasak/status/1970881745227833694
https://x.com/s_kymon/status/1971224323554935283
If your hypothesis at that time was that the internet would benefit tech companies, it was not a bad time to invest:
Microsoft shares were $58. Now they are $510.
=> 9% annualized ROI.
Amazon was at $4. Now it is at $220.
=> 17% annualized ROI.
QQQ was at $89 and is now at $592
=> 8% annualized ROI.
If so there is one issue with that. It is more tax efficient to have lower earnings and disguise profit and reinvestment as R&D cost.
Tech companies can do this covertly due to the jack of all trade Software Engineering (and friends) roles that could be BAU or RD work.
When a metric becomes a target it ceases to become a good metric. But when an accounting metric causes you billions of dollars in tax, and you are mostly compensated in share price not earnings it becomes really skewed!
I also wonder about the impact of the growing fraction of the economy no longer subject to gamified speculation held by private equity which is now around $3.5T AUM, but comes with other downsides because they do not seem to care about the longevity or goodwill of businesses they own and seek unsustainable maximum resource extraction rather than predictable steadiness.