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The S&P 500 has just closed above 5,000 for the first time.

Congrats to all of us who made the no-brainer decision to buy an index fund 5 years ago, 10 years ago, 20 years ago, however many years ago. We're also grateful for all the company 401K plans that made it such a no-brainer to add to an index fund from our paychecks every month, on auto-pilot, while we ignored the market pessimists and focused on our careers and businesses.

Congrats especially to the thousands who never flinched and kept buying incrementally and automatically through the bear market of 2022 and 2020. You're all gonna make it.

Congrats especially to the thousands who never flinched and kept buying incrementally and automatically through the bear market of 2022 and 2020. You're all gonna make it.

Well, they certainly HAVE made it.
The future is as yet unwritten, so the "gonna make it" might perhaps be premature.

A couple of randomly selected numbers to ponder:
S&P 500 average price-to-sales ratio since 2000-Q1: 6.767 (we're not talking about the 1930s or the 1980s here)
Current: 10.636

To the (not perfect) extent that is a not-bad yardstick of modern valuation levels, implied current "overvaluation" is 57.2%.

Not depressing enough?
The apparent typical rate of return for the broad cap-weight US market in the last couple of decades isn't really typical, it would just be the "up" side of climbing a hill.
A trend of rising valuations could just as easily have been a trend of gradually falling valuations.

I'm just trying to keep everybody chipper!

Jim

Well, they certainly HAVE made it.

They sure have, haven't they?

The future is as yet unwritten, so the "gonna make it" might perhaps be premature.

I was celebrating the S&P 500 reaching 5,000 for the first time ever, and offering words of encouragement to people who kept investing through the two recent bear markets. Pardon me for the celebration.

To the (not perfect) extent that is a not-bad yardstick of modern valuation levels, implied current "overvaluation" is 57.2%.

I'm impressed that smart people like you, who really should know better, can calculate the degree of "overvaluation" to this level of precision. Meanwhile, wise people like us retired early years ago because we made the hay while the sun was shining. We ignored pessimists who were constantly telling us the market was overvalued.

Not depressing enough?

Sorry, I'm not in the business of getting people depressed. I'm a cheerful optimist. Shrewd'm is a merry investing community.

If you prefer being depressed, or getting other people depressed, seek professional help.

The apparent typical rate of return for the broad cap-weight US market in the last couple of decades isn't really typical, it would just be the "up" side of climbing a hill.

Last couple of decades? If your investing thesis has been wrong for 20 years, it's time to change your investing thesis.

Mechinv

I'm impressed that smart people like you, who really should know better, can calculate the degree of "overvaluation" to this level of precision.

Now now, no need to get upset. I haven't said that the market was that overvalued, let alone that the number I mentioned is the right one. I'm merely pointing out that IF (and to the extent) one thinks those assumptions are valid, that is the conclusion the numbers imply. It's just information. Information per se has no agenda. I thought they were numbers that more people should be aware of; being better informed makes one a better investor.

I don't intend to make people depressed, but it's true that numbers can do that to a person. Valuation levels go up sometimes, and they go down sometimes. Sometimes mean reversion makes more sense as a baseline assumption than extrapolation does. In 1999 a survey of investors showed that the plurality expected the market to return 20%/year: they were in the second group and should have been in the first group. Cheery or not, it's better to be aware that things have become very expensive compared to historical and recent norms, rather than being blind to the fact and expecting to see the prices rise to the sky forevermore. Nobody likes an unpleasant surprise.

In the long run, a Boglehead's long run real total return is going to be reasonably approximated by real GDP growth during that investing career plus the dividend yield the day they buy. (Plus or minus a one time change in valuation levels--it's most reasonable to expect a move in the direction of "normal", whatever you estimate that to be). Those numbers don't add up to the sort of returns that have been seen from the broad US market lately, so expecting more of the same well into the future probably isn't wise. What the wise man does at the beginning, the fool does in the end.

On a cheerier note---
I personally think the line of reasoning using price/sales is towards the bearish end of possible analysis, since (for example) the large growth in industry concentration of US corporations in dozens of industries has caused typical pricing power to rise and typical net profit margins have risen, at least for now. Consequently there is a good case that we've seen a one time step change upwards in the value of a given dollar of sales, if you will.

Again, that happy result for capitalists ought not to be extrapolated. And it doesn't change things THAT much. Any grounded analysis of what the broad US market valuations are will say the same thing, to varying extents: things are a whole lot more expensive these days than they used to be, and even a lot more expensive than they have been on average in this richly priced century so far. Even if valuation levels stay this high forever, certainly not something I would count on, returns would necessarily be low. Each dollar invested is getting a much smaller pile of future dividends and earnings than it used to--those are the things that produce the value that produces the returns.

Last couple of decades? If your investing thesis has been wrong for 20 years, it's time to change your investing thesis.

Sorry, I don't get your comment at all. Wha?
Tautologically, the average valuation measures in the last 20 years that I cited have been typical in that period: though they could not have been known in advance, they would have been the perfect foundation for one's investing thesis. I have been extremely fortunate with my own returns in the last 20 years, but that's in large part because I never buy something that is plainly overvalued relative to any reasonable expectation of its forward returns. I wouldn't touch SPY with a barge pole at these levels.

Jim

I was celebrating the S&P 500 reaching 5,000 for the first time ever, and offering words of encouragement to people who kept investing through the two recent bear markets. Pardon me for the celebration.

There were to statements, one direct, one implied.

Direct : Recent market returns have been terrific - yup; pretty hard to argue with that.

Indirect : Future market returns will also be terrific - hmm; that is much more debatable - and probably a more important question to answer.

tecmo
...

Indirect : Future market returns will also be terrific - hmm; that is much more debatable - and probably a more important question to answer.

No, I never said "future market returns will also be terrific". I don't have a crystal ball, and I am not in the predictions business. Market corrections of 10% or more are extremely common during an investor's lifetime. On average, the market declined 10% or more every 1.2 years since 1980. Corrections are healthy and I expect them to occur. With every such correction, the weak hands get shaken out.

Heck we just had a bear market that ended only a year ago. And another one that happened only 4 years ago.

I'm talking to people in their wealth building years who are decades away from retirement. Don't listen to pessimists who have been proclaiming that the market is overvalued every year since 2011. They've been telling you your future is bleak, in terms of expecting average market returns. They've been wrong every year.

We're lucky to be living in the greatest country in the world. No other country on earth has produced the likes of Apple, Amazon, Microsoft, Meta and Nvidia. This is one of the reasons why our market is expensive and Europe's market is cheap by comparison. You have to pay for quality, and you have to invest for the very long term (10+ years).

No, I never said "future market returns will also be terrific".

and then

I'm talking to people in their wealth building years who are decades away from retirement. Don't listen to pessimists who have been proclaiming that the market is overvalued every year since 2011. They've been telling you your future is bleak, in terms of expecting average market returns. They've been wrong every year.

I guess this might be a difference of perspective; but seems like you are implying that future returns will be similar to those in the past - and its not at all obvious that will be the case.

BTW: Nice strawman. I don't know anyone who has claimed that the market is overvalued every year for since 2011 - in fact many who are now claiming the market is expensive have also "pounded the table" at various points in the past indicating that it was time to "back up the truck".

tecmo
...

Nice strawman. I don't know anyone who has claimed that the market is overvalued every year since 2011

Let me introduce you to Jim :) Not denying that he has made many valuable contributions that we are all grateful for. But here's just a sampling of what he's claimed every year since 2011. ..

My favorite is his post in 2018 where he advised everyone NOT to invest in an index fund because that would be the same as having a note on our backs saying "kick me" :)

mungofitch in 2011 wrote:
"I think we could see quite a large sell-off, perhaps in several legs. I estimate that the S&P500 is more than 50% overvalued at the moment, higher than the final highest peak of the 1960's secular bull market."

http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2012 wrote:
"... so you end up with the total [market] overvaluation of approximately 38% compared with historical norms. Let's say "almost certainly 30%-45% overvalued" to allow for error bars."

http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2013 said, and I kid you not:
"If one also recognizes the overvaluation of the market right now and the length of the serious investing career of a typical investor, it's probably a very good rule of thumb simply to assume that US stock prices will never rise further. In real terms, the S&P might well be at the same level in 20-25 years.

[Yes, he really said the above. See link below.]
http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2014 said:
"Things definitely ain't cheap: certainly more expensive than average on almost any look-back time frame and valuation metric.
As a result, future average-stock returns are likely to be modest at best from here. ... So, in that one narrow sense, if there was ever a bubble before, then this must be one too.
http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2015 said:
"My own view is that the broad US stock market is definitely overvalued. For example, the median P/S among the largest 400 non-financial S&P 500 firms hit a fresh all time high on Friday. Using that yardstick, the typical non-financial S&P firm is 78% overvalued compared to its typical valuation level since 1986 and 55% overvalued compared to typical since 1997."
http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2016 said:
"The one thing that he seems to be right about, in this case, is that stock valuations are plainly so high right now that medium-long run forward returns for the broad US market are guaranteed to be sub-par starting from here. ... Using last-full-year sales, the median P/S metric is 54% above its average since 1986."
http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2017 said:
"Using the same approach with a decade of trailing P/E ratios instead of forward estimates, you get [the market is] 31% overvalued relative to the average multiple in the last decade. Those two approaches suggest that with typical "modern era" pricing levels you would expect the S&P to be more in the range of S&P 1795-1865 versus ~2350 today."
http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2018 said:
"I wouldn't touch the *typical* S&P 500 stock with a ten foot pole right now, and would certainly advise anyone and everyone NOT to start a long term buy and hold of SPY these days. Might as well put a note on your back that says "kick me".
http://www.datahelper.com/mi/search.phtml?nofool=y...

mungofitch in 2019 said:
"So, either the S&P 500 is at a new "permanently high plateau" of valuation levels, or it's due for a bad stretch when some of the overvaluation goes away."
http://www.datahelper.com/mi/search.phtml?nofool=y...

I'll stop here, but you get the idea. Anyway, time to head to the pool for another margarita.

Cheers!

Let me introduce you to Jim :) Not denying that he has made many valuable contributions that we are all grateful for. But here's just a sampling of what he's claimed every year since 2011. ..

Point taken, in this context it makes sense to infer that he has continually viewed the S&P500 as overvalued since 2011. I don't have the same access to data (or time) - but I know of other situations where he has issued a "strong buy" signal that have worked out very well during this period.

A very consistent assessment (hate to speak for Jim but this is my interpretation) is that the SP500 by historical measures has been overvalued since 2011 and continues to be so. The most commonly referenced measure is Price to Sales. He has offered potential rationale for why this has been the case but his general view is that this will revert back to historical levels or at the least not rise to the extent it has.

However there is no question that in the time period referenced (2011-2024) returns have been very strong despite this break from historical trends.

Note: I don't agree with all of Jim's assessments - and in fact have had 30% - 50% of my portfolio in the SP500 for a very long time (25+ years). As of right now index investments make up 42% of my holdings as listed here:

https://www.shrewdm.com/MB?pid=884101954

I tend to challenge opinions to help me strengthen my insights - I hope this doesn't come across as confrontational - that is not my intention. Hope you enjoy your drink!

tecmo
...

<<Let me introduce you to Jim :) Not denying that he has made many valuable contributions that we are all grateful for. But here's just a sampling of what he's claimed every year since 2011. ..
My favorite is his post in 2018 where he advised everyone NOT to invest in an index fund because that would be the same as having a note on our backs saying "kick me">>

Just a note:
Jim has also given numerous buy signals when he believed things were cheap. (For Berkshire and for the Index.)
I'm curious why you didn't include any of those posts?
I don't have the time or inclination to look them all up but here is one example...

"2022-10-01 Market bottoms..."

https://mungofitch.com

Let's not forget a severe bear market can wipe 50% off the market at any moment. That's why stocks have higher expected returns, because they are riskier. (Unfortunately that risk rears its head now and again.)
If anything like this happens anytime soon Jim could end up looking pretty smart...we shall see!

The Dot-com bubble burst and the financial meltdown of 2007 to 2009
Began – February 2000
Ended – August 2009
Duration – Nine years and seven months
Percentage decline from top to bottom –54%

Inflationary bear market, Nifty Fifty
Began – December 1972
Ended – September 1974
Duration – 22 months
Percentage decline from top to bottom –51.86%

In 2014, in the fifth edition of Stocks for the Long Run, Jeremy Siegel wrote:
"In the first four editions of Stocks for the Long Run, I noted that the last 30-year period when the return on bonds beat stocks ended in 1861, at the onset of the Civil War.
That is no longer true. The 11.03% annual returns on long-term government bonds surpassed the 10.98% on stocks for the 30-year period from January 1, 1982, through the end of 2011."

Wow! A full 30 year period where the fixed income investor ended up with more money than the stock investor! And slept much easier as well.

Cheers!

Make sure your portfolio matches your need, willingness and ability to take risk...and as any Japanese investor from the 1990's will tell ya, diversification is your friend!

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