overvalued stocks chapter #253
I've thought stocks were overvalued since the mid 1990s, LOL. That doesn't mean I've avoided stocks entirely, but I've been a relatively conservative investor with my retirement funds for decades, compared to what my time horizon has been. When I was younger, I'd stick between 40-60% stocks. With retirement approaching, I'm currently at 23% stocks.
But there's overvalued, and there's OVERVALUED, and lately I've been collecting more and more ways of measuring the present overvaluation. In some ways, stocks are more highly valued now in the US than ever before.
With respect to earnings, it doesn't look as bad, because for the past decade corporate earnings have grabbed a larger chunk of GDP than ever before. Both Obama and Trump were kind to after-tax corporate earnings.
But with respect to broader economic measures, such as corporate revenues or GDP, stocks have never been so highly valued as they are right now. With respect to GDP, the market capitalization of public company stocks is now twice as high as it was during the late 1990s bubble.
One rational market observer wrote that according to his calculations, there is no human time horizon long enough to compensate for the risk of buying stocks at present valuations. In other words, no matter how young you are, if you buy stocks now and hold them until you die, you are likely to lose money.
We used to tell younger investors that if they had a time horizon of 30 years, they could ride out the coming bear markets and eventually profit by the time they retired. Now you'd need a time horizon of 70 years to be reasonably certain of riding out the coming bear markets.
But the alternative in my TSP account would be to put all my chips on the US Dollar, and I fear that's a losing bet also, with little upside and enormous downside potential. Right now the US Dollar is riding high, participating in 80+% of all world currency trades. But we have competitor currencies, we aren't the world's only choice for storing value.
I used to think, rather automatically, that in the event of a bear market I'd add stocks to my retirement account. I did that about a year ago during the brief but violent Pandemic Bear Market of 2020. I added a modest amount of stocks, but when prices quickly rebounded I sold back down to my current defensive posture. Now, I'm concerned that stocks are so overvalued that even a garden variety bear market (down 20%) would not correct prices. Maybe stocks would have to fall 75% to become fairly priced again, in historical terms.
We've become accustomed to stocks increasing in value by 10%/year, even though the economy is only growing by 2%/year with 2% inflation. That extra 6%/year has resulted from bidding up the value of stocks well beyond their fundamentals. It's been a great thing for those who own stocks, but the math makes no sense to me anymore. The global economy has come to resemble a gigantic Ponzi scheme, supported by the mass pursuit of ever-more imaginary levels of wealth. I'm not sure there is such a thing as rational investing anymore. The financial markets have uncoupled from reality.
I'm only continuing to invest because of the 100% matching --> I put away 5% and my employer matches with another 5%. It's free money, so long as I sock it away until I turn 59 1/2. But other than choosing the most conservative of the "LifeCycle" funds I really don't know what to advise a retirement investor today. You're likely to lose money no matter what. If your employer isn't matching, I'd say forget about retirement for now, enjoy your money while you have it. Spend it on stuff you and your family will enjoy. Create memories, not nest eggs. Because a fox is going to eat your nest eggs before you reach retirement, you can be fairly certain of that.
But there's overvalued, and there's OVERVALUED, and lately I've been collecting more and more ways of measuring the present overvaluation. In some ways, stocks are more highly valued now in the US than ever before.
With respect to earnings, it doesn't look as bad, because for the past decade corporate earnings have grabbed a larger chunk of GDP than ever before. Both Obama and Trump were kind to after-tax corporate earnings.
But with respect to broader economic measures, such as corporate revenues or GDP, stocks have never been so highly valued as they are right now. With respect to GDP, the market capitalization of public company stocks is now twice as high as it was during the late 1990s bubble.
One rational market observer wrote that according to his calculations, there is no human time horizon long enough to compensate for the risk of buying stocks at present valuations. In other words, no matter how young you are, if you buy stocks now and hold them until you die, you are likely to lose money.
We used to tell younger investors that if they had a time horizon of 30 years, they could ride out the coming bear markets and eventually profit by the time they retired. Now you'd need a time horizon of 70 years to be reasonably certain of riding out the coming bear markets.
But the alternative in my TSP account would be to put all my chips on the US Dollar, and I fear that's a losing bet also, with little upside and enormous downside potential. Right now the US Dollar is riding high, participating in 80+% of all world currency trades. But we have competitor currencies, we aren't the world's only choice for storing value.
I used to think, rather automatically, that in the event of a bear market I'd add stocks to my retirement account. I did that about a year ago during the brief but violent Pandemic Bear Market of 2020. I added a modest amount of stocks, but when prices quickly rebounded I sold back down to my current defensive posture. Now, I'm concerned that stocks are so overvalued that even a garden variety bear market (down 20%) would not correct prices. Maybe stocks would have to fall 75% to become fairly priced again, in historical terms.
We've become accustomed to stocks increasing in value by 10%/year, even though the economy is only growing by 2%/year with 2% inflation. That extra 6%/year has resulted from bidding up the value of stocks well beyond their fundamentals. It's been a great thing for those who own stocks, but the math makes no sense to me anymore. The global economy has come to resemble a gigantic Ponzi scheme, supported by the mass pursuit of ever-more imaginary levels of wealth. I'm not sure there is such a thing as rational investing anymore. The financial markets have uncoupled from reality.
I'm only continuing to invest because of the 100% matching --> I put away 5% and my employer matches with another 5%. It's free money, so long as I sock it away until I turn 59 1/2. But other than choosing the most conservative of the "LifeCycle" funds I really don't know what to advise a retirement investor today. You're likely to lose money no matter what. If your employer isn't matching, I'd say forget about retirement for now, enjoy your money while you have it. Spend it on stuff you and your family will enjoy. Create memories, not nest eggs. Because a fox is going to eat your nest eggs before you reach retirement, you can be fairly certain of that.