IN THE ONGOING battle between those who believe that the stock market is in a bubble and those who don’t, you may have heard mention of something called CAPE, short for cyclically adjusted price-earnings ratio. Among market indicators, it has the strongest track record in predicting future market returns.
What does the CAPE ratio say about today’s market? It’s flashing red. According to CAPE, the U.S. stock market is more overpriced today than it has been at any time since the 2000 market peak.
ARE FINANCIAL markets in a bubble? It’s a question I’ve never liked. I believe stocks and bonds are fairly valued most of the time, which means it’s extraordinarily difficult to beat the market averages and our best bet is to buy index funds.
But at the same time, during my adult life, there have been three key occasions when markets lost touch with reality: Japanese stocks and real estate in the late 1980s, technology stocks in the late 1990s and housing in the mid-2000s.
FOR MORE THAN a year, veteran investment manager Jeremy Grantham has been arguing that the U.S. stock market is in a bubble. And not just an ordinary bubble, but “an epic bubble… one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.”
And yet, despite Grantham’s concerns, the market has only continued to march higher. In a recent interview, Grantham reiterated his concerns in even stronger terms.
ECONOMIST JOHN Maynard Keynes once observed that, “It is better for reputation to fail conventionally than to succeed unconventionally.” This is probably true in many realms. It’s certainly true in the investment world.
As the last 12 months have demonstrated, extreme and unexpected events can and do happen. But analysts whose job it is to make economic forecasts rarely go too far out on a limb. Sure, there are some forecasters who will take a chance with a view that’s far outside the consensus.
LAST YEAR WAS MY first bear market. I’ve been thinking a lot about it and about the astonishing stock market recovery that followed, so I’m better prepared for next time around. Here are three lessons I learned in 2020:
Lesson No. 1: Buy aggressively when markets fall. When the market crashed last February and March, I invested more in stocks. But I regret not having invested a lot more, despite having cash available.
THE CAPITOL WAS invaded by an angry mob 11 days ago. A week later, the House of Representatives voted to impeach the president. But if you’d been looking only at the stock market, you would have no idea.
Not only is the market higher today than it was the day before this all started, but also the VIX—the market’s “fear gauge”—is lower. From the perspective of the stock market, it’s been an ordinary few weeks.
I’VE LONG BEEN flummoxed by the difficulty people have managing money. It all seems so intuitive: Save, invest, repeat. Buy more when the market falls and a lot more when it crashes. Rebalance by adding more to losing asset classes—which today means buying value and international stocks.
Now, don’t get me wrong: I’m no financial genius. I’ve made my share of blunders. But I also know that being a do-it-yourself investor has saved me boatloads of money.
WHEN I THINK BACK on 2020—and I know we aren’t quite done with it yet—I’m reminded of the movie Alexander and the Terrible, Horrible, No Good, Very Bad Day. But to paraphrase Nietzsche, chaos isn’t all bad—if something positive ultimately emerges from it.
Below are five financial lessons that, in my mind, are worth carrying beyond this year:
1. Stock prices respond to news—but never in a predictable way. Leading up to the election,
YOU’RE DRIVING DOWN the highway when, all of a sudden, a maniac goes speeding by, weaving in and out of lanes. Most of us have experienced this—and most of us have the same reaction. “That guy is crazy,” we think to ourselves. “If he doesn’t slow down, someone’s going to get hurt.”
But suppose that an observer instead responded, “That fellow’s speed is perfectly appropriate. Nothing at all wrong with it.” Now, you might think it’s the observer who’s the crazy one.
CONGRATULATIONS are in order for Jay and Kateri Schwandt, a Michigan couple who recently welcomed a new baby girl. This might not seem like an event that’s worthy of national news, except this is the Schwandt’s 15th child—and the first 14 are all boys. In an interview, Jay Schwandt said he didn’t think a girl was even possible: “You know after 14 boys, we just assumed perhaps medically it just wasn’t meant to be.”
The Schwandt’s new baby illustrates a point that’s often debated in the world of personal finance: When you see a pattern,
AT 82 YEARS OLD, investment manager Jeremy Grantham has seen his fair share of market cycles. And as a U.K. native living in the U.S., he has the interesting perspective of an outsider. In a recent interview, Grantham shared his unvarnished view of the U.S. market. “American capitalism has become fat and happy,” he said. The U.S. stock market is in a bubble that will likely burst within “weeks or months.”
I don’t believe anything should be judged over the span of a single week.
IT’S HALLOWEEN, but not much frightens me—at least financially. My portfolio is broadly diversified, I have the insurance I need, and I have enough set aside for retirement. The highly improbable could happen, but I’m not going to lose sleep over that.
Still, even for those of us in decent financial shape, I see two key reasons for concern. We have no control over either—which is why they might seem scary—but we can take steps to limit the potential fallout.
STOCKS WENT INTO a freefall earlier this year, as I’m sure you recall. But all of a sudden, on March 23, everything changed. The market turned around and, just as quickly as it had dropped, it rebounded. Remarkably, the U.S. stock market is now in positive territory for the year.
What happened on March 23? The situation with the virus didn’t get any better. And it wasn’t Congress or the White House. What happened was that the Federal Reserve issued a statement.
IT SEEMS EVERYONE has an opinion about the markets—and they are, of course, entitled to those opinions. But here’s the irony: Some of the most successful investors have also been among the least dogmatic in expressing their views.
Perhaps it’s the humility gained from repeatedly trying and failing to second-guess the financial markets. These veteran observers of markets are a stark contrast to the swashbuckling managers who flaunt their confidence about the likely direction of stocks and bonds—a sales strategy they use to encourage people to buy products they don’t need.
WHAT DO HIGHER corporate profits truly mean to investors? Or, put another way, this 77-year-old neophyte wants to know, “How is investing in stocks different from gambling?”
Don’t get me wrong, I invest in stocks and I understand they’re the best way for most of us to grow wealthy over time. What I don’t get is, “Why? What causes a stock to increase in value?”
I’ve researched the question and what I find is a lot of talk about earnings per share,