Subject: Re: S&P Valuation...
This discussion always comes up when a 5%-10% correction occurs. People get faked out and miss out on the following rise up. Pull up a 5 year or 10 year chart on SPY (logarithmic scale) and eyeball all the dips and ensuing rise.
Drawdowns shake out the weak hands....

Though not technically wrong, this does also sound like precisely the sort of thing you hear near the top of a secular bull market.

A 5 or 10 or even 15 year chart doesn't tell you much, since that entire stretch (with the shortest big bear dip in ages in 2020) has been basically one bull market.

Using my smoothed real earnings yields (not comparable with other people's, but same idea):
Current level is 2.618%, like a CAPE of 38.2
5 years ago was 2.790%, like a CAPE of 35.8
10 years ago was 4.322%, like a CAPE of 23.1
15 years ago was 5.205%, like a CAPE of 19.2

Smoothed real earnings have really soared in this stretch, but even using the contemporary earnings at each point as I did, 15 years ago the market was only half as richly valued as today.

So I wouldn't want to extrapolate this kind of multiple expansion, and I wouldn't want to take any lessons from how well buying the dips has worked lately. This trend of rising multiples is definitely going to halt at some point, and I think it's very likely that it will go into reverse for a while. I have no idea how to predict when that might start or how much valuation levels might fall, but if valuation levels can double on trend for 15 years then a halving that takes that long seems hard to rule out as a theoretical possibility.

Sitting on cash takes discipline, but it doesn't necessarily mean you lose out. Imagine somebody who sold "way way too early" when Mr Greenspan gave his famous speech about irrational exuberance in December 1996, and sat in cash missing out on the party through the market top in early 2000. What gains that person gave up! But that person could have bought back in at lower valuation levels than where they sold (higher trend earnings yields) for in 2001, and virtually any time 2002-2017, more than 20 years later. The S&P 500 real total return from the 2000 market top was negative without exception until May 2013.

For me, the lesson from that (having lived through it as an investor) is that buy and hold is not a good strategy starting from a nosebleed valuation level. That being said, I admit it can make some sense strategically to ride it up so long as it is clearly continuing: until there are no longer signs that the bull is still underway. (there are definitely still signs at the moment, with fresh market highs just a few days old).

One view of any market: all price increases which are faster than value increases are ultimately transient, within rounding error. So the extra gains you see during those stretches are always going to go away unless you sell while they're still high.

Jim