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Time to Sell Your Stocks?

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My simple answer is no.

However, on a deeper examination, I'm starting to think that my answer is a less-definitive "maybe?" or even a "sure, but just some."

I'll start off by saying that I like to view myself as a buy and hold investor. I don't jump in and out of stocks. I don't try to time the market, except with 5% of my portfolio that I use for speculation. (I think of it like a cheat day on a diet. It keeps you in check.)

Here's what's scaring me:

Shiller PE at 25.84%


That chart is the Shiller P/E from Multpl.com. It is named after Robert Shiller who has more smarty pants degrees than you can shake a stick at. He's currently a professor at Yale. He's also author of the very popular book Irrational Exuberance.

When I look at that chart, I see that the Shiller PE has been above 25 only 3 times in 130+ years. One was in 1929, just before a fairly famous crash. Another was in 1999, again before a famous crash. Finally, around 2003-2007 it consistently hovered around 27, before... you guessed it, a famous crash in late 2008.

Do you see a pattern? I do and I hope it isn't a false one.

The mean and median numbers are around 16, so from a historical perspective, 25 is a high PE. However, when I look at this chart and look at the last 20 years, it looks like the mean might be around 25. Even in the crash of late 2008, it barely got to the mean and median number of 16. Maybe a Shiller PE of 25 is the "new normal"?

There are a lot of economic factors in play that might be propping up this Shiller PE of 25. I'm not an economist and I don't even pretend to be one on a website. However, we know that the Fed has kept interest rates low for a long time. Some are starting to suggest that they will be rising. I don't know if that's in the cards and even if it is, I can't imagine the Fed would move very fast on it. There's also the matter of some 42 quantitative easing events (there may or may not have actually been 42).

In any case, I can see how the 25 number would be higher than the norm... simply due to these factors. Over time, I expect these to go away, and maybe that 25 Shiller PE can't be supported any more.

I've found this CAPE Ratio website helpful when looking at individual stocks. The CAPE Ratio is another term for the Shiller PE. You can look up individual stocks or look at the most recent newsletter to see the stocks with the lowest CAPE PE. Their latest newsletter is a few months old, but it still useful. It looks like a Who's Who of troubled companies like GM and Citigroup on there. (You thought I'd call out MLM company Avon right? Wrong. Oops, I guess you got me.)

I've been looking closely at Citigroup as a stock that has been sufficiently battered and worth investing in. It would be interesting to see an ETF of some of these low CAPE companies. I wonder how it would perform as they work to right their ship.

Posted on June 3, 2014.

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3 Responses to “Time to Sell Your Stocks?”

  1. Money Beagle says:

    I don’t see a crash coming only because of the fundamental difference in how the economy has grown. Many have complained that the growth over the last few years has been too slow, but in all honesty, I think it’s actually a good thing. With the slow growth, companies have not leveraged themselves as they have in past periods of growth. This means that if growth slows, you won’t automatically have a ton of companies in trouble that start shutting their doors and putting people out of work. Now, you’ll have an economy that is better able to withstand things like higher interest rates or other economic factors that might otherwise have dumped us into a recession. The growth might be considered slow and boring, but I think it will lead to a smooth growth pattern without as many ups and downs.

    • Lazy Man says:

      Contrarian, at this point the jury can stand to hear a few more rounds. Might as well continue until it is finished since it’s gone this long already.

  2. Contrarian says:

    Lazy – My simple answer is hell yes!

    There are five sectors of the economy: 1). household sector, 2). government sector, 3). corporate sector, 4). Freddie and Fannie, 5). banking or private sector issuers of asset backed securities. Every sector is deleveraging, except the government sector – the Fed is pumping out trillions in QE in order to top up the economy to offset the deleveraging in the other four sectors, and to prevent us from slipping into a depression.

    Generally, a credit expansion drives markets up. A credit contraction takes them back down. Credit is still expanding, but “excess liquidity” (surplus left over between QE stimulus and what the federal government absorbs through borrowing) is going to contract – sharply. But in the end it hardly matters what will bring stocks down. Sometimes they go down for no reason at all. The goal is to buy stocks when they are cheap, not expensive, relative to their historic average. And as you mention, on a CAPE (Cyclically Adjusted PE Ratio) of 24.7, the S&P 500 now trades at a 50% premium to its historic average CAPE of 16.5. So the best advice is to get the hell out of the market, and stay out, until the index is cheap again.

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