Have We Hit The Top?

[UK]

Just some nice charts from: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

 

Edited December 3, 2023 by UK

[Gamecock-YT]

7 hours ago, UK said:

Just some nice charts from: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/

 

 

 

 

Don't think 25 year average is a great comp. Guess let's you capture 3 different bubbles in action.

[Gregmal]

All I’d take from this is that you pretty much never get to buy when the entire thing is showing sub 15x and that 17/18x is pretty average. I’d also argue that the 50s-80s is more or less an irrelevant and incompatible comp to todays markets, for so many reasons. 
 

That said I still question why anyone would care. Just easier to look for companies, sectors, areas, whatever…that offer an attractive profile. We re beginning to see some of these threads demonstrate how people spend years on end being scared or calling for doom to pretty much no avail. 

Edited December 3, 2023 by Gregmal

[UK]

28 minutes ago, Gamecock-YT said:

 

 

Don't think 25 year average is a great comp. Guess let's you capture 3 different bubbles in action.

 

Selecting period right perhaps is always a problem. But you are probably right. But again not sure how practical it would be to include some longer previous periods with a valuations of single digits? Or what is a fair PE for the SNP500 in your opinion? 16x looks quite reasonable for me. Then I subjectively like this period since it basically matches my own participation in the stock market, despite I was mostly busy doing learning from mistakes and other silly things for the first decade of this period:)

 

Edited December 3, 2023 by UK

[Gregmal]

What further amplifies the ridiculous nature of the negativity and perpetual “expensive” bemoaning, is that we just got to what? 16-18x index earnings, WHILE so much of the index is made up of stocks people regularly bemoan as even more ridiculously valued? So in other words, non fab 7 or whatever, we were probably into what would be considered absolutely absurdly cheap territory for much of the components? But missed it because of headline staring and recession forecasting I guess?

[Santayana]

Between the over representation of the mega-caps, and the advent of index ETFs, I'm not sure much historical data about the major indexes is really relevant anymore.

[Gregmal]

Whereflation? Whaflation? Huhflation? This whole spectacle was so laughably predictable and played out just like COVID. In fact, that herky jerk parabolic spike then plummet chart we talked about oh so much through the COVID and supply chain cycle…making its last trip through the system, currently with interest rates. People need to stop being so gullible. 

Long live entrenched and sticky. Maybe next year we get some deflation(remember when folks laughed at that idea) as jerkoff Jerry realizes he got hoaxed by high finance and academia. 
 

Got a conspiracy theory that Ackman controls Fed policy and that’s why he’s always trading it so perfectly. The most recent Twitter pumping of higher for longer(investors would be STUPID to accept ANYTHING less than 5.5%!) and then cover and bet on lower rates was classic game is rigged shit because it was all sandwiched around…largely nothing happening. 

Edited December 6, 2023 by Gregmal

[Gregmal]

We need a collection of Jerrys greatest hits.

 

Early 2021 inflation was transitory(off by 18 months, expert!)

2022-3 Fed Stress Tests on banks using MAX rate hikes 200 bps higher(then raises rates 500 bps triggering bank failures)

Says any rate hike would have a multi year lag, then whines a couple months into the process "not seeing enough progress"

Keeps jawboning about inflation being persistent and entrenched as we parade from 9-2! Openly worries about energy prices despite energy prices being no higher than they were decades ago

Laments higher than normal inflation while being totally unaware of the fact that the only reason it current is higher, is because of housing and HIS rate hikes are the reason housing is elevated

 

And these are our experts! 

 

Only thing more amusing is that theres still no shortage of market followers who wait around trying to anticipate what this clown will say at his next presser or boys and girls club speech. 

 

[ValueArb]

On 12/3/2023 at 9:07 AM, Gregmal said:

What further amplifies the ridiculous nature of the negativity and perpetual “expensive” bemoaning, is that we just got to what? 16-18x index earnings, WHILE so much of the index is made up of stocks people regularly bemoan as even more ridiculously valued? So in other words, non fab 7 or whatever, we were probably into what would be considered absolutely absurdly cheap territory for much of the components? But missed it because of headline staring and recession forecasting I guess?

 

I think the Shiller PE is the best, but still imperfect way to look at the market price to value. Lets ignore how top heavy the S&P 500 has gotten and how Shiller doesn't account for tax or interest rates and assume you could use it as a market timing tool. If you did,  you'd have to be out of the market for years on end, even decades, all the while missing growth in S&P earnings until you get back in. I don't see any mechanical rule that is possible to follow from it. For example, if you get out at a 30 PE and back in at a 20 PE, it would have gotten you out in 1929 just before the peak but put you in again in 1930 to ride it down to a 70% loss in 1931.  

 

Or out in April, 1997 (800) and not back in until Oct 2008 at 1000. That looks great until you realize that adjusting your basis for dividends lowers it to $570 and increases your returns to 5% annualized. So if you had the incredible self-will made of pure steel making decisions emotionlessly on positive expectation mathematics that is necessary in order to be able to sit out the market for 11 and a half years you would have, roughly broken even holding bonds instead of the market?

 

In reality if you are going to actively invest, measures of how cheap or expensive the market is shouldn't matter at all. You either find attractively priced opportunities, or you build up cash and keep looking in different places. If the S&P 500 is overvalued, that doesn't mean mid-caps or small caps are, and if they are all generally overvalued that doesn't mean there aren't still a few great opportunities in all of them. Buffett clearly described the internet bubble as it was happening, but he didn't sell his stocks. No one did.

Edited December 6, 2023 by ValueArb

[TwoCitiesCapital]

8 hours ago, ValueArb said:

 

I think the Shiller PE is the best, but still imperfect way to look at the market price to value. Lets ignore how top heavy the S&P 500 has gotten and how Shiller doesn't account for tax or interest rates and assume you could use it as a market timing tool. If you did,  you'd have to be out of the market for years on end, even decades, all the while missing growth in S&P earnings until you get back in. I don't see any mechanical rule that is possible to follow from it. For example, if you get out at a 30 PE and back in at a 20 PE, it would have gotten you out in 1929 just before the peak but put you in again in 1930 to ride it down to a 70% loss in 1931.  

 

Or out in April, 1997 (800) and not back in until Oct 2008 at 1000. That looks great until you realize that adjusting your basis for dividends lowers it to $570 and increases your returns to 5% annualized. So if you had the incredible self-will made of pure steel making decisions emotionlessly on positive expectation mathematics that is necessary in order to be able to sit out the market for 11 and a half years you would have, roughly broken even holding bonds instead of the market?

 

In reality if you are going to actively invest, measures of how cheap or expensive the market is shouldn't matter at all. You either find attractively priced opportunities, or you build up cash and keep looking in different places. If the S&P 500 is overvalued, that doesn't mean mid-caps or small caps are, and if they are all generally overvalued that doesn't mean there aren't still a few great opportunities in all of them. Buffett clearly described the internet bubble as it was happening, but he didn't sell his stocks. No one did.

 

I generally agree with this. I use it as more of a measure of the tide. 

 

I want to be taking less risk with less concentration and have more fixed income when stocks are expensive and the tide looks to be going out. Perhaps even running select shorts/puts when volatility is cheap and fundamentals support it. 

 

If the Shiler PE was lower, I'd be taking more risk, more concentration, and would most likely own less fixed income and more equity. I'd probably even be speculating in calls instead of selling covered calls. 

 

Maybe it doesn't work, but I believe there's a time to let the wind carry you and a time to row - and in expensive periods o think you need to be rowing and doing everything you can to fight that tide as it rolls out. 

Edited December 7, 2023 by TwoCitiesCapital

[mattee2264]

Shiller PE is being distorted by Mag7 because if you apply a 10 year earnings average to high growth stocks it is always going to result in a very high number. The same kind of thing happened in the late 90s when the Shiller PE topped out above 40. 

 

And all the Shiller PE is supposed to do is predict 10 year returns. If history is a guide then with the Shiller PE around 30 you can expect  10 year returns of around 5-6% per annum. That is still better than you can get on a long bond. 

 

The table below is quite instructive. But it is also a bit deceptive. Because it shows returns from your starting point. It doesn't show the dilution in returns from selling at some earlier point and sitting out of the market for several years waiting for the predicted return to increase. 

 

[changegonnacome]

I was looking over recent data which is impressive in terms of MoM inflation & by golly its what the early innings of a possible soft landing would kind of look like......but I cant escape the basic high level economic math here somewhat confirmed by the tick up in todays data.......while some expansion of the labor force has surprised to the upside such that aggregate goods and services being produced in the US have expanded on top of an expanding labor force....& we've had some energy tailwinds on the input/headline inflation side......the underlying productivity math driving domestic made in america inflation is still not on point and cant be.......and AGAIN nominal wage increases negotiated against a tight labor market at the end of 2023 are going to be injected in the US at EoY which will become spending growth in 2024.......core has leveled out at an uncomfortably high level but is about to get a boost again in early 24 such that cuts get put off the table by the Fed (once again) dashing hopes with further higher for longer talk (assuming we dont have a weakening economy....but isnt the soft landing dream 'back to 2' & no weakening???)

 

Short version - a 3.7% unemployment economy with poor demographics & 1.5% productivity growth giving itself ~5% nominal pay increases (see below) is, repeat after me, not a 2% inflation economy.....its a 3-3.5% inflation economy.

 

So something still has to give here across that equation -  a productivity boom or a couple of million workers showing up that we've never counted are the soft landing solutions.....the reality is that inflation is more likely to be solved by nominal spending falling significantly.

 

https://www.atlantafed.org/chcs/wage-growth-tracker#:~:text=Do you want to ask,individuals observed 12 months apart

 

So if cuts are indeed coming as is priced in.......they aren't soft landing/good news cuts.......they are the other kind.

 

This inflation cycle ends in the usual way IMO - rates remain higher for longer UNTIL the economy/labor market rolls over.

[TwoCitiesCapital]

It makes me wonder if it already is beginning to. Job openings are starting to contract bigly and my personal experience suggests that many of the job openings I see are "fictitious" in that the companies don't seem to have any interest in filling them. I've personally applied to dozens over the last 18-24 months and heard nothing - no rejections and no interviews - while many of the roles are still listed suggesting nobody else has had any luck getting responses either.

 

Much of the surprise job gains we've seen in recent months have shown contraction in full time jobs being offset by part time labor and people holding multiple jobs - hardly the sign of a strong labor market. 

 

Trade $ are up, but my understanding is gross tonnage is down. This suggests we're mistaking nominal inflation for prosperity. 

 

The economy has definitely been more resilient that I expected, but I do think you're starting to see the cracks appear for the next leg down

Edited December 13, 2023 by TwoCitiesCapital

[mattee2264]

I think it depends on how much resolve the Fed has to get inflation back to 2%. They are using the lag factor as an excuse to pause. And jaw boning about how their stance is restrictive. But if they were less political they would admit that the massive fiscal deficits are completely dominating the impact of rate increases and most of the decreases in inflation to date have very little to do with them and more to do with supply chain issues easing, commodity prices falling, and companies reaching the limits of their ability to price gouge consumers. 

 

They are also ignoring the massive loosening of financial conditions as a result of the market recovering most of its 2022 losses and long term bond yields sliding. 

 

It would also not surprise me at all if the economic data that the Fed is "dependent" on is very manipulated. 

It is a typical trick. Report strong headline data. Then in later quarters quietly revise it downwards. Some evidence of that already in the jobs data. And there is a massive divergence between GDP and GDI. 

So with all this smoke and mirrors it is difficult to tell how strong and resilient the economy really is. 

 

And that seems to be the basis for the soft landing optimism. The economy has been strong and resilient avoiding recession in spite of an aggressive tightening cycle. Inflation has pretty much fallen in a straight line and is heading back to target. And non-inflationary growth will allow the Fed to cut rates. So you end up with a Goldilocks scenario in which 2024 EPS will be higher and 2024 interest rates will be lower. And AI optimism is an added kicker. So little wonder you are getting SPY 5000 and even SPY 6000 market calls. 

 

 

[Spekulatius]

My guess is once inflation hits about 2.5% run rate, the Fed starts cutting. My thinking is that at 2.5%, they can cut to 4.5% and still have a 2% buffer to being "neutral".

Timeline would be the first cut by mid year 2024.

[changegonnacome]

3 hours ago, Spekulatius said:

My guess is once inflation hits about 2.5% run rate, the Fed starts cutting. My thinking is that at 2.5%, they can cut to 4.5% and still have a 2% buffer to being "neutral".

Timeline would be the first cut by mid year 2024.

Yeah suspect SuperCore needs to be down at this level before they’d consider moving….and as you say the justification would be that even with cuts rates would remain restrictive.

 

We’ll find out in Jan/Feb/Mar - but if the economy is in as good a shape as folks say….SuperCore is going to re-accelerate in Q1 fueled by nominal pay increases taking ‘good’ cuts off the table.

 

If inflation continues to moderate into Q1 (in spite of these nominal pay increases)…that’s the tell that the underlying economy is flagging and you’ve got a pullback by the consumer….and so the cuts to come are really the most common central bank cuts - rescue cuts.

[Gregmal]

Didn’t we say the same exact thing last year about the big wage price spiral in January 2023? These things are largely imaginary. 

Edited December 13, 2023 by Gregmal

[Gregmal]

Only question left is what’s the next hoax?

[Viking]

It appears we have seen the peak in interest rates for this cycle. Wow! The Fed meeting today was shockingly dovish. Materially lower interest rates will be stimulative for the economy. How do stocks, especially small caps which are cheap, not rip higher? Look at all the high dividend stocks - 6 to 7% yields? Nuts. 
 

Soft landing is looking more and more likely…

Edited December 13, 2023 by Viking

[ValueArb]

https://en.wikipedia.org/wiki/Rollover_(film)

 

No matter what the fed does, interest costs on the national debt are going to continue to skyrocket for a few years as debt rolls over to the new rates (and to a smaller part as we add new debt). Jane Fonda will tell you it's a potential catastrophe!

 

 

 

[james22]

I'm guessing we won't hit the top this year until Dec 29th.

[changegonnacome]

2 hours ago, Gregmal said:

Didn’t we say the same exact thing last year about the big wage price spiral in January 2023? These things are largely imaginary. 

Think what we said was that nominal wages increasing at ~5% clip with 1.5% productivity growth is incompatible with 2% inflation….that’s proved correct….inflation didn’t just go away in 2023 as many predicted & we got ZERO rate cuts as the market had predicted…..inflation has proved sticky….higher for longer played out….the stickiness in that ~3.x% SuperCore range is the made in America inflation we’ve talked about. It remains unduly high albeit with some recent MoM readings that give soft landing vibes.

 

Two things are probable in Q1 2024 based on this (1) MoM SuperCore will reaccelerate as increased wages become increased nominal spend (let’s see on that one ) or (2) absent number one the most likely explanation will be a consumer diverting pay increases to debt pay down/prudence. Which is annolgues to an economy slowing.

 

Let’s see it’s beyond interesting how this hiking cycle ends. 

[Gregmal]

Man idk. A lot of ridiculous forecasts and predictions were made. We were told all these kinda dumb little 1 and 2 percents and insignificant monthly rounding errors forecast absurd price targets for “the markets”. Recessions have been “called” for more than 2 years now; they’ve always been “just around the corner”…now the saga is over and we re at ATHs basically but I’m sure we ll still hear how we shoulda been in bonds or that the next big scary drop is due any minute now. 
 

Biggest takeaway isn’t really the importance of spiking the football, but rather to ignore the hysteria and think with one’s head, in the real world, and that stocks tend to do quite well over time. It’s not much more complicated than that. 

Edited December 13, 2023 by Gregmal

[Spooky]

Feels like everyone is jumping the gun assuming the Fed will just pivot and start cutting rates early next year. We would need to see some real deterioration in the labor market to justify lowering rates in my opinion. My gut feeling is they hold rates here longer than people would like.

[mattee2264]

Something fishy about the Fed signalling rate cuts during an election year when core PCE is still twice the target rate. 

 

Wasn't it just two weeks ago that Powell told the market not to speculate about rate cuts. Then lo and behold the Fed confirm that rate cuts are now on the table.

 

Irony is that by promising rate cuts within the next year that is going to discourage consumer and investment spending because why borrow now when you can borrow a year later at much cheaper rates?