I’m not a fan of clickbait titles. This may look like a clickbait title, but it isn’t.
It’s an honest thought I had yesterday based on real analysis of more than 100 years of data. Seriously.
Here’s a current (3/6/2018) chart of the S&P 500:
Go ahead and click Image for larger version in a new tab. We might be using that later (Or click for the latest chart on Yahoo and make sure you select the Max number of years.)
It looks pretty good except for the dot-com collapse around 2000 and the sub-prime mortgage collapse around 2009. If those two events didn’t happen, it might look like a Bitcoin chart, right?
I’ve got another chart to show you. Regular readers might know what’s coming up. It’s:
Yep, the good-old Shiller P/E Ratio chart. (Sometimes it’s better known as the CAPE ratio.)
I’ve argued before that there is a crash any time it gets over 25. It may take a few years, but it seems to happen.
That’s all stuff that I have written about in the past. Here’s another piece of data to consider:
This means that currently the market’s price is nearly 33 times its earnings. Throughout more than a hundred years of history it’s been closer to 16.5 earnings (averaging the very close “mean” and “median” numbers).
If the market drops 50% tomorrow it would be at the historically normal valuation.
See, the title wasn’t clickbait, right?
Where Do We Go From Here?*
You may think from the above that I’m suggesting that you shouldn’t invest. I don’t think that and I still own about 90% of my portfolio in stocks. That portfolio is in retirement accounts, so I won’t be touching them for years and years anyway.
I think there a few things that may make you feel better from the dire math scenario I proposed above:
- Since around 1988, a solid sample size of 30 years, the Shiller P/E is 24.95 (using yearly chart data). Maybe advances in globalization, internet, better access to investing markets, etc. means that there is a “new normal” of Shiller P/E being 25? This time includes at least 3 crashes too.
So while 33 is still higher than 25 (my 5-year confirmed this math), maybe the downside isn’t 50%. Maybe it’s 33%. That’s still a big drop, but it’s got to be somewhat comforting, right?
- This is the S&P 500, which means they are American companies. You can invest in so many other places. I’ve increased my asset allocation in Europe and emerging markets. Their valuations aren’t as high and they seem to be performing well.
- This is the stock market. You can invest in bonds, real estate, commodities, and a bunch more stuff. I’m normally a very, very aggressive investor. I believe a smart plan is to be more conservative in your investing when valuations look high. I’m just going to be a regularly aggressive investor at these valuations.
I’d like to add one more personal note on the last point. I have been buying Twitter stock for quite a few years now. (I’ve written about it many times.) It was a terrible investment for quite awhile. It was really terrible. Overall, I’m up around 60% from what I paid for it. While that may sound great, the general stock market has probably done the same or better over that time.
Today, I pulled the trigger and sold some Twitter shares. I’m moving the money to my favorite bond ETF (Vanguard’s BND fund). It’s a very basic asset allocation shift towards being more conservative in my investing.
What are your thoughts on the market? Let me know in the comments below.
* If you know me at all, this a subtle nod to perhaps one of the best hours in television history: