Latest news with #RobertShiller
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
Yahoo
26-01-2025
- Business
- Yahoo
The Stock Market Has Breached This Critical Level Only 6 Times in 135 Years -- History Couldn't Be More Clear About What Happens Next
Over the last two years, the market's climb has seemed unstoppable. Every challenge from inflation, rising Treasury yields, and geopolitical tensions has been met with resilient investors buying the dip and taking valuations higher and higher. Part of this has been fueled by the screaming-high valuations of the "Magnificent Seven" stocks, driven by bullish bets on artificial intelligence (AI) and its potential to disrupt nearly every aspect of life. Although many analysts believe the bull rush can continue in 2025, the stock market has now breached a critical level, something that's occurred only six times in history. And history couldn't be more clear about what happens next. Investors frequently draw on historical patterns and data to try to forecast what might happen in the future. One of these data points for the stock market is called the S&P 500's (SNPINDEX: ^GSPC) Shiller price-to-earnings (P/E) ratio, or the CAPE ratio. Yale Professor Robert Shiller popularized the CAPE ratio, which looks at the price of the S&P 500 divided by its average 10-year inflation-adjusted earnings. The ratio uses earnings over a decade to smooth out volatility and irregularities. A higher CAPE ratio tells investors the market may be overvalued, while a lower CAPE ratio may be a signal to investors to buy stocks, similarly to how one might evaluate a single company using the P/E ratio. Here is the S&P 500 CAPE ratio dating all the way back to 1890. As you can see, the average Shiller CAPE ratio is 17.7. But as of this writing, the ratio has risen to the dangerously high level of 37.9. The all-time high CAPE ratio of 44.2 occurred right before the dot-com crash. In fact, the CAPE ratio has only breached 30 six times in 134 years, and those instances were usually followed by a market crash. 1929: The CAPE ratio surpassed 30 in 1929 and was followed by two epic crashes in the stock market known as Black Monday and Black Tuesday on Oct. 28 and 29. The Dow Jones Industrial Average (DJINDICES: ^DJI) fell 25% in those two days and kicked off the Great Depression, a very difficult period for the American economy and stock market. Mid-1997 to 1999: The CAPE ratio hit a staggering level of 44.2 right around the turn of the century and in the lead-up to the dot-com crash. The stock market surged in the back half of the 1990s as investor exuberance raged over the advent of the internet. However, the market clearly got ahead of itself. Late 2017 to late 2018: The market spent the last few months of 2017 and most of 2018 trading with a CAPE ratio above 30. Things fell apart after the first Trump administration began announcing tariffs and started a trade war with China. Early 2020: The CAPE ratio surpassed 30 in early 2020, right before the COVID-19 pandemic essentially shut down the economy for months at a time, leading to a short-lived bear market. Mid-2020 to June 2022: The CAPE ratio traded above 30 for nearly two years, riding a big rally following the worst months of the pandemic due to ultra-low interest rates and various stimulus policies. Eventually, the Federal Reserve realized it was behind the ball on inflation and began hiking rates intensely. Late 2023 to present: The CAPE ratio has now been above 30 since the end of 2023 as the market's two-year bull run has raged thanks to AI, the prospect of lower interest rates, and now Trump's presidency. The CAPE ratio had only risen above 30 three times prior to 2020. Since then, it's been the norm for the market to trade with a high CAPE ratio. Past performance is no crystal ball, and that rings especially true today given how long the CAPE ratio has been elevated. Obviously, the market doesn't just immediately crash when the CAPE ratio surpasses 30. In the past, the ratio has run at elevated levels for years like in the 1990s, in 2020 to 2022, and today. But the environment today has many parallels to the dot-com era in that investors were extremely excited by the growth and opportunities the internet would bring. AI is having a similar effect on the economy, and many investors also cite Trump and his pro-business policies as powerful tailwinds. While no one can know when this historic run will end, it's important for investors to understand this historical context so they are better prepared for the future, even if things may not play out in exactly the same manner. 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