Latest news with #RobertShiller
Yahoo
5 days ago
- Business
- Yahoo
If you're feeling FOMO, envy and greed about record stock prices, you're not alone. That's how market bubbles form.
Some stock-market contrarians reassuringly say that investors' current concern that the S&P 500 SPX, the Dow Jones Industrial Average DJIA and the Nasdaq COMP are all forming a frothy U.S. market bubble is exactly why the market isn't in one. But a market bubble can materialize even when most investors are worried about one. Like now. A recent Bank of America fund-manager survey found that a record 91% of survey participants believe the stock market is overvalued, and Google Trends shows a sizable increase in recent weeks in the number of finance-related searches focusing on bubbles, as you can see from the chart below. 'I am a senior citizen': My car needs $3,500 for repairs, but only has a trade-in value of $6,000. Do I bother fixing it? Clash of the titans: The hottest momentum stock meets the most notorious short seller When it comes to bubbles, contrarian analysis typically gets it wrong. An analysis of past bubbles suggests not only that widespread concern about bubbles is consistent with one forming — such worry actually plays a central role in a bubble's latter stages. Consider the definition of bubbles from Robert Shiller, the Yale University finance professor who won a Nobel prize in large part because of his research into stock-market bubbles. In his 2000 book 'Irrational Exuberance,' Shiller wrote that a bubble is self-perpetuating: 'News of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors.' Shiller added that these newcomers, 'despite doubts about the real value of an investment, are drawn to it partly through envy of others' successes and partly through a gambler's excitement.' Notice from Shiller's description that bubbles involve a high degree of cognitive dissonance: Despite concern about stocks' overvaluation, investors bet heavily on equities. This dissonance is readily apparent in the Bank of America survey, for example: Even though 91% of survey respondents say that stocks are overvalued, they on balance are more bullish than they've been in months. Investors resolve the dissonance by telling themselves they will know when the bubble is about to burst and get out in time. But the history of bubbles teaches us that this belief represents a triumph of hope over experience. It's simply the greater-fool theory in disguise. AI illustrates how quickly a bubble can burst. Earlier this week the company reported preliminary results for its July quarter that fell far short of analyst expectations, and its stock plunged almost 26% in a single session. It's true that significant differences exist between the current market and the top of the internet bubble, as Daniel Newman, CEO of the Futurum Group, recently argued in a MarketWatch column. But no two bubbles are alike, and the existence of differences between today and early 2000 doesn't mean we're not in a bubble. As I recently pointed out, 10 time-tested valuation indicators show today's stock market to be more overvalued than those at any other time in U.S. history. Benjamin Graham, the father of fundamental analysis and author of the investing classic 'The Intelligent Investor,' made fun of the greater-fool theory by telling a joke, which Warren Buffett of Berkshire Hathaway retold in his 1985 shareholder letter: 'An oil prospector, moving to his heavenly reward, was met by St. Peter with bad news. 'You're qualified for residence,' said St. Peter, 'but, as you can see, the compound reserved for oil men is packed. There's no way to squeeze you in.' After thinking a moment, the prospector asked if he might say just four words to the present occupants. That seemed harmless to St. Peter, so the prospector cupped his hands and yelled, 'Oil discovered in hell.' Immediately the gate to the compound opened and all of the oil men marched out to head for the nether regions. Impressed, St. Peter invited the prospector to move in and make himself comfortable. The prospector paused. 'No,' he said, 'I think I'll go along with the rest of the boys. There might be some truth to that rumor after all.' ' The bottom line? Contrarians are wrong in thinking a bubble can't be forming just because there is widespread current concern about stock-market overvaluation. Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at More: 10 stocks with recently increased dividends — and why they merit a closer look Also read: Why your stock portfolio may actually 'feel' depressed that summer is almost over 'Am I delusional?' My wife and I are in our 50s and have $11 million. We're not leaving it to our kids. Is that wrong? CoreWeave's lockup is about to expire. What that could mean for the stock.
Yahoo
29-07-2025
- Business
- Yahoo
The Stock Market Is Doing Something Witnessed Just Once Ever Before -- and History Has a Clear Answer on What Happens Next
Key Points The S&P 500 and Nasdaq Composite indexes have produced outstanding returns for investors over the last five years. A huge portion of those gains has stemmed from expanding valuation multiples. Investors need to look at additional context to understand what to expect. 10 stocks we like better than S&P 500 Index › Despite several ups and downs, the last five years have been nothing short of spectacular for stock investors. Since midyear 2020, the S&P 500 (SNPINDEX: ^GSPC) has produced a compound average total return of 17% per year, well above its historic average. The tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) has performed nearly as well, with a 16.5% average return. Those returns come in spite of two massive declines of 19% or more in the S&P 500 and 23% or more in the Nasdaq, in 2022 and 2025. Today, both stock indices trade at new all-time highs. But one stock-market indicator suggests the indices could be in store for another substantial decline in price in the not-too-distant future. It just reached a level seen only once before in history, and it has a flawless track record of predicting significant downside in stock prices. The stock market looks historically expensive The sticker price of a stock doesn't tell you very much about whether or not it's a good value. In order to judge whether a stock is expensive, most investors will look at its price-to-earnings (P/E) ratio. The P/E takes the share price and divides it by the earnings per share for the company. All things being equal, investors prefer to buy stocks when their P/E ratios are low. But earnings for companies generally don't grow in a straight line. Recessions, inflation, and all sorts of other economic pressures can impact earnings per share. And usually they affect the entire stock market, not just individual companies. That's why economist Robert Shiller developed the cyclically adjusted price-to-earnings (CAPE) ratio. The CAPE ratio takes into account the last ten years of earnings and adjusts each year for inflation. The standard P/E ratio only looks at one year of earnings. Looking at a much longer period evens out the impact of economic shocks like recessions. As of this writing, the S&P 500's CAPE ratio has climbed to 38.8. That's above the month-end peak from 2001, and the highest level we've ever seen outside of the dot-com bubble, when the ratio climbed above 40. To give that valuation some more context, the S&P 500 (along with its earlier equivalents) has traded at an average CAPE ratio of 17.6 based on data going back to 1871. That multiple has climbed considerably in the modern era, though. Still, the average CAPE ratio for the index since the start of the century (which includes the peak of the dot-com bubble) is 27.6. The current valuation is 40% higher than that. Here's what's happened every time stocks have been this expensive There have only been a handful of times when the S&P 500 traded at a CAPE ratio above 30. Two of the most notable instances were in 1929, just ahead of the Great Depression, and between 1997 and 2001, the height of the dot-com bubble. Note that the CAPE ratio only exceeded 30 for a couple of months in 1929 before the stock market crashed, kicking off the Great Depression. By comparison, the S&P 500 continued to climb higher for years after breaching the threshold in June of 1997. Eventually, however, there was a massive decline in stock values, with the Nasdaq Composite falling 77% from its peak. In the three other recent periods when the S&P 500 CAPE ratio exceeded 30, the index went on to drop 20% or more each time: in 2018, 2020, and 2022. With the CAPE ratio pushing toward record territory, it looks like another 20% decline may be on its way. Are stocks truly expensive right now, or is it different this time? It's worth noting that higher valuations have become the norm. And there's a key factor to consider when determining whether the S&P 500 has become overpriced: interest rates. Warren Buffett once wrote: "In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset." One handy metric for comparing expected returns for stocks to fixed-income vehicles like bonds is the earnings yield. That's simply the inverse of the P/E ratio. Investors can compare the earnings yield to the yield on debt instruments like government bonds to see if they're getting good value. Researchers Victor Haghani and James White prefer to compare the earnings yield to the yield on inflation-protected government bonds (also known as TIPS) as the best way to determine how much extra return someone can expect for taking on the risk of investing in equities. They point out that the last time we saw the CAPE ratio climb nearly this high in 2021, TIPS yielded negative 0.7%. As a result, stocks still offered considerable excess expected returns. That didn't stop the index from falling more than 20% in 2022, though, as interest rates climbed. When valuations rose during the dot-com bubble in 2000, TIPS actually offered a higher yield than the earnings yield on stocks. And sure enough, the S&P 500 produced negative real returns over the next decade. Today, the earnings yield for the S&P 500 with a CAPE ratio of 38.8 is around 2.6%. Investors can get about 2% from 10-year TIPS right now. That puts the excess return for stocks at about 0.6%, which is relatively low. So stocks do indeed look extremely expensive right now. Investors aren't getting much excess return for the risk they're taking on with equities, compared to "risk-free" government bonds that automatically factor in inflation. That doesn't mean investors should sell their stocks entirely and put all their money into bonds. A shift in asset allocation may be warranted, especially for those focused more on capital preservation. But most investors may simply want to focus on finding good values in the stock market. Despite the historically high CAPE ratio, there still remain plenty of great values in the universe of investable stocks. Should you buy stock in S&P 500 Index right now? Before you buy stock in S&P 500 Index, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the for investors to buy now… and S&P 500 Index wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $636,628!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $1,063,471!* Now, it's worth noting Stock Advisor's total average return is 1,041% — a market-crushing outperformance compared to 183% for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of July 28, 2025 The Motley Fool has a disclosure policy. The Stock Market Is Doing Something Witnessed Just Once Ever Before -- and History Has a Clear Answer on What Happens Next was originally published by The Motley Fool
Mint
18-05-2025
- Business
- Mint
Just how expensive are stocks after all the ups and downs? We check the math.
The market has absorbed the early blows of President Trump's tariffs, making up all its lost ground. Yet that rekindles a Wall Street worry from earlier this year: By the typical measures, stocks look very pricey right now. Following outsize gains in recent years, some analysts entered 2025 concerned that high valuations left share prices especially vulnerable to any hint of trouble in the economy. And so far, stocks have delivered slightly worse returns than bonds this year—even after their recent rebound. Here is a look at how expensive stocks are currently, and what that might mean for their future performance: P/E ratios There are myriad ways to value stocks. The most well-known is the price/earnings ratio. The most common applications of this metric compare stock prices with a company's past 12 months of corporate earnings, analysts' expectations for its next 12 months of earnings or so-called cyclically adjusted earnings: the average annual earnings of the past 10 years, adjusted for inflation. When the whole S&P 500 is looked at, all three currently show investors paying a high price for every dollar of earnings compared with what they have paid in the past. Earnings yield vs. Treasury yield Wall Street analysts often like to flip the price/earnings ratio upside down, creating an earnings-to-price ratio. Known as the earnings yield, it is expressed as a percentage and sometimes used as a rough guide to the annual return that investors can expect over an extended period. Investors can then compare stocks' earnings yields with yields on U.S. Treasurys. That offers a sense of how much investors are being compensated to hold riskier investments over ultrasafe government bonds. Based on real cyclically adjusted earnings, the S&P 500's earnings yield is currently around 2.8%, or 1.4 percentage points above the inflation-adjusted 10-year Treasury yield, according to data from the economist Robert Shiller. That gap, sometimes known as the excess CAPE yield, is well below its historical average, suggesting investors are so eager to buy stocks that they are willing to accept a smaller premium for the risk of losses. History as a guide Just because stocks look expensive by these measures doesn't mean they are about to plunge. In periods such as the Roaring '20s and the 1990s tech bubble, frothy markets defied gravity for years. Still, those rallies eventually ended, leading to years of price declines. There is, as a result, a fairly tight relationship between valuations and what stocks have historically returned over longer periods, such as 10 years. Measures of relative valuation, like the excess CAPE yield, have been especially good at predicting the relative performance of stocks versus bonds. A smaller excess yield has typically led to a smaller return compared with bonds over the next 10 years; a bigger premium has led to a bigger excess return. The drawbacks Aswath Damodaran, a professor at the Stern School of Business at New York University, is widely known on Wall Street as 'the dean of valuation." He says one drawback of a standard S&P 500 earnings yield is that it doesn't account for future earnings growth, effectively treating stocks like bonds with fixed annual payments. He has seen little evidence that valuations can be used to time swings in the market. Damodaran has devised his own estimate of the risk premium that stocks offer over bonds. His incorporates analysts' expectations for companies' earnings growth. Right now, that calculation suggests that stocks are more reasonably priced than other metrics—although Damodaran says that he uses it as a tool to value individual stocks, rather than a guide to buying or selling the overall index. Putting them to use Others are happy to employ valuation metrics in their investment strategies. As a reasonable guide to future returns, valuations are one tool that investors can use to build portfolios that match their risk tolerance and to make adjustments over time, said Victor Haghani, founder of Elm Wealth. It might make sense for a young person to own 100% stocks, but most people by the middle of their careers want something less volatile, he said. An investor who put $1 into the S&P 500 some 60 years ago could have outperformed the market by switching completely to 10-year Treasurys when the excess CAPE yield fell to particularly low levels, according to a Wall Street Journal analysis of the data compiled by Shiller. For example, investing in bonds after any month that the excess CAPE yield averaged less than 1.75%—and stocks otherwise—would have yielded a real annualized return of 6.6%, or 0.5 percentage point more than holding stocks the entire time. Write to Sam Goldfarb at
Yahoo
30-03-2025
- Business
- Yahoo
Do you fear a stock-market crash? Why your worrying is a plus for stocks.
More than half of Americans believe a U.S. stock-market crash is imminent, but that doesn't make it more likely. If anything, in fact, crash anxiety is a contrarian indicator, meaning the stock market performs better when investors are more worried about a crash than when they are relatively complacent. I'd be more worried if the emerging investor consensus were that a crash was unlikely. 'He gave me a week to get out': My son and I bought a house — now I'm homeless and living in a car. Can I sue him? My father died, leaving everything to my 90-year-old stepmother. Do I have a right to ask her if I'm in her will? I met a friend for lunch. When the check arrived, she said, 'Thank you so much for paying!' Was I taken for a fool? 'She has been telling him lies': My sister convinced my father to sign everything over to her. What can I do? I ate noodles during law school and graduated debt-free. Now my sister needs money. Is it OK to say no? We know how many investors are worried about a crash because of a recent survey conducted by Allianz Life of a 'nationally representative sample of 1,004 respondents age 18+.' According to the insurance company's 2025 Q1 Quarterly Market Perceptions Study, 'more than half (51%) worry that another big market crash is on the horizon.' See: More than half of Americans are now worried about a stock-market crash: survey We know that crash anxiety is a contrarian indicator by analyzing survey data compiled since 2001 by Yale University professor Robert Shiller. One question in each monthly survey is: 'What do you think is the probability of a catastrophic stock-market crash in the U.S., like that of October 28, 1929, or October 19, 1987, in the next six months?' The chart above plots what I found. The S&P 500's SPX total-return index, on average, performs better following months in which crash risk is particularly high than after months in which that risk is deemed to be especially low. There's no way of knowing whether Shiller's survey would agree with the Allianz Life survey that crash anxiety is especially high right now. That's because Shiller's survey is reported with a three-month lag, and the latest reading is for December. Based on the many emails I get from readers, however, I can confirm that anxiety about a possible stock-market crash is definitely higher than it has been in years. One reason why crash anxiety is a good contrarian indicator is that the actual probability of a stock-market crash in the next six months is very low, far lower than the subjective probabilities that investors assess even when they are exuberant. Since investors' beliefs have so little relationship to reality, they instead reveal a lot about their mood. We know the objective probability of a crash because of research conducted by Xavier Gabaix, a finance professor at Harvard University. According to the model he and his co-authors developed, there is just a 0.33% probability of an October 1987–magnitude one-day plunge (a 22.6% decline, to be exact) in the next six months. Contrast that with the 51% of respondents in the Allianz Life survey who worry that a crash is 'on the horizon.' Note that the focus on this research is on one-day plunges, and not on the stock market's long-term potential — which, as I noted in a recent column, is quite bleak. But a major bear market can occur without the stock market suffering any huge one-day plunges. Take the bear market that ensued after the internet bubble burst in March 2000, for example. The S&P 500's worst one-day return during that decline was a loss of 'just' 5.8%. In the global financial crisis of 2008-09, the benchmark's worst one-day return was a 9% loss. Clearly, bear markets can produce huge losses without suffering one-day crashes along the way. The bottom line: Be far more worried about a major bear market than a one-day crash. Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at . Also read: Here's a reminder of how vulnerable our economy is to a severe bear market The 'misery index' is creeping higher. Does that spell doom for stocks? These are the 10 fund-management firms that lost the most money in the past decade. You'll never guess No. 1. 'I'm being held hostage': I bought my parents' house and added my brother to the deed. He won't pay the mortgage. What now? 'My daughter harasses me and wants to know where I go': She's after my money. How do I protect myself? 'They hate our generation': My son and daughter-in-law want us to sell our house — and move to Oregon to start a commune If you love dividend stocks, check out these 11 companies with room to boost their hefty payouts Sign in to access your portfolio
Yahoo
15-03-2025
- Business
- Yahoo
Don't do anything about your 401(k) until Tuesday
If you're wondering what to do about your retirement portfolio amid all this craziness and turmoil, try waiting until this coming Tuesday. That's when we're due to get the latest news on what the world's top fund managers have been doing with our money during the last month of turmoil. My stepmother inherited 100% of my father's estate. She's leaving everything to her two kids. Is that fair? 'In their last days, our parents changed their will': They left me $250,000, but gave my sister $1 million. What should I do? Apple now faces a problem far bigger than tariffs or weak iPhone sales My husband has dementia and will need care. Will Medicaid go after my money if I use it to pay off our mortgage? 'He claims to be a nihilist': I told my friend to sell his Tesla shares. He stopped speaking to me. Is that normal? If they've completely bailed on stocks — buy! But if they haven't, you might want to think twice. Or even three times. It hasn't even been a month since fund managers told BofA Securities that they were eagerly buying U.S. stocks with both hands, even though they also said the market was wildly overvalued. As this column pointed out at the time, this was obviously insane. Since then, the Dow Jones Industrial Average DJIA has fallen nearly 4,000 points. The S&P 500 SPX has fallen 8%, even including the latest bounce, while the Nasdaq Composite COMP and the Russell 2000 small-cap index RUT have fallen just over 10%. The so-called Magnificent Seven MAGS group of tech stocks — Apple AAPL, Amazon AMZN, Alphabet GOOG, Meta META, Nvidia NVDA, Microsoft MSFT and Tesla TSLA — has fallen nearly 15%. Someone who responded to the survey by betting against the fund managers and purchasing the Direxion Daily S&P 500 Bear 3X Shares exchange-traded fund SPXS would have made 30% in a few weeks. Booyah! The fund managers' survey is a powerful magnetic south, or contrarian indicator. When these fund managers are overinvested in stocks, it is generally a bearish signal — and vice versa. The fund managers' survey is the basis for this column's regular 'Pariah Capital' feature, where we highlight the assets that the big-money investors don't want and don't own. These often prove to be terrific investments. If the next survey shows that fund managers have turned cautious, this offers at least some room for the market to find a floor, even if temporarily. Once the big money has already sold its stocks, it has less room to bail further. None of this, though, necessarily addresses the longer-term issue. The S&P 500 index of U.S. stocks currently sells for 20 times the forecast per-share earnings of the next 12 months. Or, to put it another way, for every $100 you invest in the index, you can expect $5 in after-tax earnings over the next 12 months, a 5% yield. By various other measures, such as those followed by Nobel Prize-winning economist Robert Shiller, the late Nobel laureate James Tobin or legendary stock-market investor Warren Buffett, U.S. stock prices are very expensive compared with history. Doubtless this is explained by the current completely calm and normal situation. International markets, such as those tracked by the Europe, Australasia and Far East index, are cheaper. Currently the EAFE index sells for an average of 14 times forecast earnings, equal to a 7% earnings yield. Meanwhile the situation looks more interesting among bonds. President Donald Trump and Treasury Secretary Scott Bessent have both made dismissive comments recently about the importance of the turmoil on the stock market. But they aren't taking a similar view of the bond market. And they couldn't, even if they wanted to. MAGA conservatives are all acutely aware of what happened to Liz Truss, the U.K.'s MAGA-adjacent prime minister, during her turbulent seven-week administration in 2022. Truss's government speedily collapsed after it lost control of the bond market, sending prices plummeting and long-term rates skyrocketing. Even though Truss quickly resigned, her political party was eviscerated in the elections two years later. When it comes to the bond market, we are all James Carville now. Trump and Bessent need 10-year U.S. Treasury bond yields BX: TMUBMUSD10Y to come down. That long-term figure is the key interest rate for the entire economy, driving the borrowing rate for corporations and homeowners as well as the federal government. A fall in long-term interest rates will bring down the rates on fixed-rate 30-year mortgages, which may unlock the frozen housing market. It may stimulate domestic economic production and activity. It will mean the U.S. government can service its long-term debts more easily. Oh, and when U.S. rates come down, that should weaken the dollar, which helps boost economic production and exports and hurts imports. Cutting imports is a key component of Trump's avowed economic agenda and helps explain his moves to impose tariffs. It cannot be a positive sign for the administration, therefore, that bond yields have stopped falling in recent days and started rising again. The rate on the 10-year is up to 4.32%, compared with 4.15% earlier this month. Bonds are like seesaws: If the yield falls, the price rises. So if the administration needs that rate at 4% or below to make Treasury bonds a buy, not a sell. Meanwhile — wait until Tuesday. 'This woman destroyed my heart and soul': After my wife died, her mother turned on me — and presented me with a secret will As stocks stumble, investors should take a lesson from the Cuban Missile Crisis, says this bull 'It's been a scary ride': My family has $800K in stocks. We lost 2 years of market gains in a few weeks. Do we sell — or buy? Are we now in a stock-market correction, pullback or bear market? Here are 6 charts to watch. 'Is it finally time to freak out?' I'm in my 50s and worried about the $650K in my 401(k). Sign in to access your portfolio
