Author Topic: Is it too early to call an economic top?  (Read 2232 times)

Liberty

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Re: Is it too early to call an economic top?
« Reply #10 on: October 11, 2018, 09:04:40 AM »
Hard to say...  In terms of the general US stock market I personally do expect pretty mediocre/bad returns going forward, but that doesn't mean it can't keep going up 2% per year for 10 years, in which case where we are today would not be the "top."

People have been predicting mediocre forward returns (the new normal of low returns) since around 2011.

I think it's very hard to predict the future, but it makes people feel conservative and like they're being safe when they predict mediocre returns.

In reality, who knows what will happen?
« Last Edit: October 11, 2018, 03:29:15 PM by Liberty »
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CorpRaider

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Re: Is it too early to call an economic top?
« Reply #11 on: October 11, 2018, 03:03:54 PM »
To me you have to be evidence-based and systematic when it comes to this type of stuff (and most things actually).  Otherwise you run a huge risk of fking up your portfolio and your psyche.

I do tinker with a value + trend/momentum system in of my accounts (unless stocks are expensive and in a not in an uptrend, I want to be long).  Out of U.S. stocks in that one as of today. 
« Last Edit: October 11, 2018, 03:11:00 PM by CorpRaider »

TwoCitiesCapital

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Re: Is it too early to call an economic top?
« Reply #12 on: October 11, 2018, 03:49:30 PM »
Hard to say...  In terms of the general US stock market I personally do expect pretty mediocre/bad returns going forward, but that doesn't mean it can't keep going up 2% per year for 10 years, in which case where we are today would not be the "top."

Yes this COULD happen, but seeing as that is never how we've gotten to low decade returns in the past suggests that it's unlikely going forward. It just doesn't jive with the human psyche - we are either overly optimistic or overly pessimistic. Very rarely are we "just-right" or "just easing back" for a decade to get the require environment to support consistent 2-3% annual returns. More likely you get a big top and then a big bust.

January looked like a blow-off top to me - 10% in a single month for U.S. and International stocks?!?!? The only thing that has had me questioning that was the fact we made new highs after that. I'm not all that well versed in the rules of technical analysis, but I wouldn't have expected us to slowly grind higher to new highs like we did if January was peak-euphoria. Not saying we haven't already seen the top - just that I'm inclined to believe January was "really" it while trying to remain somewhat skeptical of that since markets don't see to agree with me.

meiroy

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Re: Is it too early to call an economic top?
« Reply #13 on: October 11, 2018, 07:02:50 PM »
Yes. But, we are all going to die. So, eat and drink and be merry.

John Hjorth

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Re: Is it too early to call an economic top?
« Reply #14 on: October 12, 2018, 12:50:39 AM »
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SHDL

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Re: Is it too early to call an economic top?
« Reply #15 on: October 19, 2018, 01:13:34 PM »
One exercise I like to do when assessing general US market conditions is to run a few simple IRR projections for a buy-and-hold-forever investment in the S&P 500 and compare the numbers with current long term bond yields. 

To do this you need to have some notion of what the future ROE and real earnings growth rates are going to be for the S&P, and of course nobody knows for sure what those are going to be, but since they have historically been in the mid teens and low single digits respectively over long horizons (without any obvious increasing or decreasing time trends), I tend to assume something like ~13% for the former and ~3% for the latter.

Anyway when I did this exercise recently I got IRR estimates in the 3-7% range adjusted for inflation. Now that is by no means terrible, but it is certainly below its historical average, and it is not particularly attractive either when compared with, say, the yields you can get on certain long term investment grade corporate bonds (already in the mid single digits, and likely to go up a bit more in the near future).

SHDL

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Re: Is it too early to call an economic top?
« Reply #16 on: October 19, 2018, 01:14:57 PM »
Some additional comments:

1

In case somebody’s wondering:  Yes there is some empirical basis for this type of “forecast.”  In short, the IRRs estimated like this are highly and positively correlated with the inverse CAPE ratio and so they inherit the latter quantity’s predictive power with regard to future long term stock returns.  And when IRR estimates have fallen as far as they have now, future stock returns have tended to be in the low single digits on average after adjusting for inflation.

2

What Liberty said is of course also true — nobody really knows anything about the future. (In fact I can’t even predict what I’m going to have for dinner tomorrow…)

But if you do this type of calculation and data work you’ll see that you will need some pretty serious deviations from historical norms to get, say, double digit real returns on the S&P over the next 10-20 years.

3

I had the same feeling as TwoCitiesCapital — that a crash followed by a recovery was more likely than a long stream of consistently low returns — and I am happy to report that I was actually able to find some evidence supporting this view. 

That being said, long term dead money in equity markets is not entirely unheard of (e.g., the Nikkei 225 — oh, the horror!).