Despite record highs in stocks in 2024, real return since the last secular peak in August 2000 still significantly lags previous periods of peak-to-peak returns

 

During four months in 2021, real return since August 2000 briefly hit the 5s: 5.06% in August, 5.02% in September, 5.17% in November, and 5.15% in December.

Real return swooned after that, as low as 3.63% in October 2022, making it seem like 2021 might have been a secular turning point.

But by October 2024 real return since August 2000 had recovered to 5.11%, and 5.2% in November, and 5.24% in December.

Is this the new secular peak?

Return might suggest, No, seeing how low it still is.

Valuation might suggest, Yes.

The annual average of the S&P 500 divided by GDP in trillions hit 186 in 2024, a level not seen since 1930 (228) on an annualized basis.

That ratio never got above 139 (2000) between 1937 (165) and 2020 (151).

And this ratio was 180 in 2021, 158 in 2022, and 155 in 2023, all unprecedented for the post-war.

But 186 in 2024 really takes the cake.

The price of the market is really, really rich for the return you get.

 

The Buffett Indicator in the news

Some people are paying attention.

The last chart below tracks the average annual valuation from 1920 through last year, based on the S&P 500. The average level for 2024 will depend on the third and final estimate of annual GDP at the end of March 2025. 209% is a real time snapshot using the Wilshire 5000 index.

Secular bear Rosie not throwing in the towel . . . again

 Rosie was on the wrong side of the trade in April 2011 when the bear went bullish. Is he again now?

He uses the same phrase, too, "not throwing in the towel", lol.

In April 2011 he claimed he wasn't throwing in the bear towel after the S&P 500 had already recovered from the 2008 debacle. Then the market slid 20% all the way to October 3, 2011, with the index falling to 1099 again, right where it was exactly three years earlier on the very same date.

It was . . . spooky!

If you had followed his take that April, you'd have lost 20% again. On top of all your losses in 2008. Ouch. Ouch.

Many of us who had kept our powder dry couldn't believe it in October 2011. We thought we were headed back to the depths of March 2009 again, too, just like the last time the market fell to 1099. I mean, that was a free-fall from there in 2008. TARP got signed in a panic that week to stop it, to no avail.

But October 2011 turned out to be more of a retest than we realized, one of the last great buying opportunities of the period. It was a brutal, crushing period of doubt, which some of us still live with.

Now it's the reverse, with unbelievable euphoria everywhere, with the S&P 500 at 6075.

A period of euphoria seems to me like a damned strange time to throw in the bear towel again, after missing out for two years by his own admission. I have no idea if Rosie is the contrary indicator he appears to be.

But the valuation of the market is pre-1920s crazy right now. It is literally not on the charts of our experience in the post-war, or even from the roaring '20s. We have GDP of $29.354 trillion, meaning a valuation of 207, when fair value has been 81 since the Great Depression.

I'm not in it, and I intend to keep staying out, because I can.

Good luck out there to those of you who go where angels fear to tread.

Tell me, Bwana: What mean GDP, why important?

 Bureau of Economic Analysis this morning here:

3Q2023 nominal GDP, first estimate: $27.6235 trillion

Nominal increase year over year in 3Q: 6.27%

Compound annual growth rate since 3Q2000: 4.375%

Compound annual growth rate 3Q1947-3Q2000: 7.275%

Underperformance from post-war, last 12 months: 13.8%

Underperformance from post-war, last 23 years: 39.86%

Current S&P 500 ~ 4175

Current ratio of S&P 500 to GDP: 151

Median ratio of same 1938-2019: 81

Current overvaluation of S&P 500 from median: 86.4%

Current fair value of S&P 500: 2238   

Vanguard's long term Treasury fund, started in 1986, set a new all time low price record yesterday: What a coincidence

 VUSTX fell to $7.37 yesterday, October 19, 2023.

Until the bond debacle of 2022, the lowest price ever was set way back in 1987, also on October 19, aka Black Monday, when the S&P 500 crashed 20.47% in its worst single day ever.

2022's new all time low for VUSTX at 8.16 had occurred on October 24, missing the anniversary of the old all time low by just three days. Also a very odd coincidence.

The debacle has only continued in 2023, and VUSTX prices haven't seen $8 since September 22nd.

ZIRP since the Great Recession is ultimately to blame for the current mess in long term Treasury securities. The clamor it created for yield drove bond investors long, culminating in the highest nominal prices ever paid for long term UST in March 2020, and the lowest yields. 30Y UST yield crashed to 0.99% on March 9, 2020, 20Y to 0.87%. Yields across the board in 2023 for 2Y to 30Y have set records for this cycle in October. Yesterday 20Y demanded 5.30%, 30Y 5.11%.

No one wants that 2020 and prior junk now, so wherever it sits it's causing collateral problems, at banks, insurance companies, pension funds, et cetera. And on the Fed's balance sheet: As of October 18th the Fed has $1.503922 trillion of UST maturing in more than 10 years on its balance sheet. It basically has to keep it until it matures, and it pays it very little to return to the Treasury as it does.

Are prices done falling?

Confident pretenders said so a year ago this month, and now here we are with $TLT investors down another 12.22% since then.

Given the obscene overvaluation of stocks, and the demand for higher yields by bond investors, cash still seems the safest place to be. VMRXX, Vanguard Cash Reserves Federal Money Market Fund Admiral Shares, has returned 4.00% ytd. You continue to lose to inflation, however.

Nothing is ever perfect.

 

1987 high and low

2022 high and low to the left, all time high and low to the right

Trump Tower triplex overvalued by at most 272%, Instagram undervalued in 2012 by 14,900%

Trump's NY fraud trial is beyond stupid.

Trump Is Right on Asset Prices

Stuart Kirk, Financial Times

 

It's been a terrible year so far for investors in US Treasury securities because of the rising rate environment, but great for stocks

UST yields rose a net 1.31% in the aggregate week over week on 7/28.

DFF rises to 5.33% after the latest FOMC rate hike.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year to date Treasury, Total Bond, Cash, and Total Stock performance using popular Vanguard funds:

VFISX +0.75% VFITX 0.90% VUSTX 1.58% VBTLX 2.05% VMFXX 2.75% lol VTSAX 19.99%!

Stocks have been the place to be, and cash has beaten even the total bond market.

Meanwhile stocks are obscenely overvalued at 169 using the latest report of GDP out Thursday:

 

The stock market remains obscenely overvalued

 On Friday it hit 167.

Off the chart.

Gold remains far more overvalued than US stocks, which is saying a lot

Gold is at least 167% overvalued relative to inflation since 1913. $600ish gold makes sense. $1600 gold does not, let alone $2067, the 2020 high.

Meanwhile stocks are off-the-charts overvalued, about 93% relative to the post-Great Depression median valuation of 81 through 2019, as of the latest GDP figures from late May.

Speculation in both gold and stocks, not to mention a host of other things, has been driven by Federal Reserve interest rate suppression since 2001.

How long elevated gold and stock prices can persist in the new higher interest rate environment is anyone's guess.

The Fed Funds rate still averaged a low 1.69% in 2022, so it's still early innings.

.

May 25, 2023

US homes were at least 84% overvalued in 2021

 Rounding out the Unholy Trinity of Big Ticket Asset Inflation, Housing joins Stocks and Bonds in similar overvaluation territory in 2021 at about 84%.

In Feb 2012 when housing bottomed after The Great Financial Crisis, a previous inflation-adjusted Case-Shiller home price index chart no longer updated for present years showed that prices had fallen into the top range of US house prices which had prevailed throughout the post-war from the 1950s to the late 1990s. Mind you, the top range of those inflation-adjusted prices.

Thanks to Democrats and Republicans, including Bill Clinton and Newt Gingrich, the American Dream, the nest of the American future, was turned into a mere commodity in the late 1990s, to be churned in the markets for profit.

Long-suppressed long term interest rates have conspired with commoditization to produce valuations which have exploded, making houses unaffordable as nests, which is why your kid is still living in your basement.

The chart below shows the nominal price figures, on an average annual basis through 2021. The blow-off tops in 2022 are even worse (the index topped 308 in June), and are not shown because the year ain't over, and prices are falling.

At an average index level of 260 in 2021, prices were inflated from 141 in 2012 by about 84%, not far below the overvaluation of stocks and bonds at 90% and higher.

 

 

 

 

The percentage holding full-time jobs through September 2022 held above 50%, disappointing the ubiquitous advocates of a Fed interest rate pivot

 Full time as a percentage of civilian population in September was 50.3%, and for 2022 through September averaged 50.15%.

Not bad, considering.

The Fed will see little evidence in this figure that its interest rate increase policy is harming employment.

Stocks on Friday collapsed after a head fake to start the week to within 1.5% of the 52-week lows set a week ago.

Long term investment grade bonds and US Treasury securities also revisited lows from 9/27/22, coming within pennies of those benchmarks.

30-year yield for UST is back up to 3.86%. It was 3.87% on 9/27. At the beginning of 2022, yield was a paltry 2.01% by comparison.

UK gilts are experiencing the same action despite the Bank of England intervening to buy bonds. 

The bond crisis is not over.

With yields soaring across the board no one wants to own the lower paying outstanding issues, which are legion, destroying their value.

But everything in the global economy is based on those, piled up in earnest after The Great Financial Crisis of 2008, and in orgiastic frenzy afterwards during the late pandemic.

Bond yields in 2022 are telling you that they are overvalued by 92%.

Stock market valuation is telling you a similar thing.

From 1938 through 2019 the median ratio of the S&P 500 to GDP is 81. In 2020 we averaged 154, or 90% overvalued.

This is the major deflationary headwind facing the world, the other side of the COVID-19 inflationary shock coin.

Push here, it comes out over there.

Modern central banking cannot escape this conundrum any more than the gold standard could.

The only thing the individual can do in this situation is to owe nothing and save everything, preferably in your hands.

Good luck.

 

 

 

 

 

 

 

 

 

 

 

 

If the S&P 500 regressed to trend level tomorrow, it would fall to about 1551 according to the geeks

Think of it as fair value.

Another way to get there: 

GDP(63) = S&P fair value

$22.061 trillion x 63 = 1390

That formula worked for most of the post-war up until the Trump era. The fancy regression analysis done by the geeks always came up pretty close to the same result, but not lately.

Still another way to look at it:

S&P 500 4230 / GDP 22.061 = 192.

That's an elevated ratio which was common before 1929, but we've never seen such levels in the post-war.

Sum ting funny goin' on. 

The continuing crisis of housing bubble-itis

Housing prices in 2017 are overvalued north of 40%. The index commensurate with the pre-1993 period should be about 142 but is instead 203.

Adam Tooze notes US house prices relative to the rest of the world are low but still run ahead of Italy and Germany.

What would happen if 44 million German Americans and 17 million Italian Americans went back home looking for a bargain? 

Total Market Capitalization To Nominal GDP Ratios, Selected Years

I have used the Wilshire 5000 level at year end multiplied by 1.2 as a proxy for total stock market capitalization (except where noted by the month), and the latest summer revisions for calendar nominal GDP, in summer 2014 for the period back to 1999, and in summer 2013 for the period back to 1971.

A ratio close to 1.0 indicates the market is fairly valued relative to GDP. A ratio less than 1.0 indicates the stock market is "on sale" to some extent (for example, a ratio of 0.48 indicates the market is trading at a 52% discount). A ratio of more than 1.0 indicates the stock market is expensive and may be considered overvalued for investment purposes (for example, a ratio of 1.72 indicates the stock market is as much as 72% too expensive).

1971   .975

1981   .480

1987   .595

1990   .622

1994   .745

1997 1.296

1999 1.715
2000 1.420
2001 1.209

2002   .912

2003 1.125
2004 1.170
2005 1.147

2006 1.234

2007 1.228

2008   .740

March 2009   .676

2009   .962

2010 1.071

2011 1.019

2012 1.113

2013 1.410

March 2014 1.407

June 2014    1.446

Historically considered, valuation of the stock market by the end of 2008 made then a much better investing opportunity than was late 2002 and early 2003, almost 20% better. And valuations have remained reasonable throughout 2010-2012 and only became expensive in 2013. The four year period beginning in late 2008 has been an excellent opportunity for those with cash to invest.

I maintain that a primary driver of conditions in 2013 was the midnight hour 2012/2013 resolution of tax uncertainty, in the form of making the Bush tax cuts and alternative minimum tax rates permanent, ending the tinkering with Social Security, and reaching a compromise on capital gains tax rates.

All hail John Boehner.

Something about riskier bonds for Bob Brinker listeners to think about

Seen here:

"The sensitivity of a bond to interest rate increases is determined by the time to maturity, not its credit rating."

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Some of Bob Brinker's followers/critics think his recent move away from all bonds with durations beyond one year was a big mistake.

If there's a bond run, which becomes more likely when bonds are overvalued, which they arguably are, selling becomes more difficult than people realize. Steep losses would be almost certain, but it is also likely that the ultra short duration bonds would recover much more quickly, and perhaps not just because they are ultra short. People might actually plow into them as they did with bonds in general in the wake of the financial panic of 2008, boosting prices.

John Hussman: It's advisable to panic before everyone else does

From the irrepressible mind of John Hussman, here:

Market conditions presently match those that have repeatedly preceded either market crashes or extended losses approaching 50% or more. Such losses have not always occurred immediately, but they have typically been significant enough to wipe out years of prior market gains. ... On the basis of historically reliable measures, the S&P 500 would have to move slightly below the 1000 level to raise its prospective returns to a historically normal 10% annually. ... Regardless of whether the market’s losses in this cycle turn out to be closer to 32% (which is the average run-of-the-mill bear market loss) or greater than 50% (which would be required to take historically reliable valuation measures to historical norms, though most bear markets have continued to undervalued levels), it’s going to be difficult to avoid steep losses without a plan of action. In our view, that action should be rather immediate even if the market’s losses are not. However uncomfortable it might be in the shorter-term, the historical evidence suggests that once overvalued, overbought, overbullish conditions become as extreme as they are today, it’s advisable to panic before everyone else does.

Fair value of the S&P500 in early April: 1033

Doug Short, here:

The regression trendline drawn through the data clarifies the secular pattern of variance from the trend — those multi-year periods when the market trades above and below trend. That regression slope, incidentally, represents an annualized growth rate of 1.75%.

The peak in 2000 marked an unprecedented 150% overshooting of the trend — nearly double the overshoot in 1929. The index had been above trend for two decades, with one exception: it dipped about 12% below trend briefly in March of 2009. But at the beginning of April 2014, it is 80% above trend, up from 76% above trend the month before. In sharp contrast, the major troughs of the past saw declines in excess of 50% below the trend. If the current S&P 500 were sitting squarely on the regression, it would be around the 1033 level. If the index should decline over the next few years to a level comparable to previous major bottoms, it would fall to the vicinity of 500.

Click the link for his charts.

How Speculators Redistribute Wealth: Find The Greater Fool

John Hussman, here:

It is certainly possible for any individual investor to realize wealth from an overvalued security by selling it, but this requires another investor to buy that overvalued security. The wealth of the seller is obtained by redistributing that wealth from the buyer. 

Both Shiller p/e and Tobin's q warn stocks are seriously overvalued

As reported by Brett Arends, here:

Smithers found that over the past century the Shiller PE had an R-squared to subsequent returns of 0.52, the “Pseudo-Indicator” one of 0.61, and the q an astounding 0.79.

So if the past is any guide, if you want to get a good estimate of the future returns from today’s stock market you should completely ignore the low yields on cash, certificates of deposit, or bonds. You should pay more attention to the Shiller PE, and you should pay the most attention to the Tobin’s q.

And what do these tell you? “As at the 31st December, 2013,” says Smithers, the “q indicated that U.S. non-financial equities were overvalued by 73% and CAPE indicated an overvaluation of 76% for equities, including financials.”

Current Fair Value Of The S&P500 Is . . . 1005

Doug Short updates his regression analysis for the S&P500, adjusted for inflation, to come up with the S&P500 today about 80% above the long term trend going back to 1871:

"If the current S&P 500 were sitting squarely on the regression, it would be around the 1005 level. If the index should decline over the next few years to a level comparable to previous major bottoms, it would fall to the 450-500 range."

Charts and discussion here.