Investor Education / Blog

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U.S. Stock Valuation Update

A reminder that valuations are NOT short-term timing tools. The purpose of monitoring and understanding stock market valuation data is so we can build more accurate financial projections using more realistic assumptions (and therefore make better financial decisions) and to assist with longer-term investment strategy (i.e. 10-12 year time horizons).

In short, folks who are chasing performance higher at current levels by adding more stocks to their portfolios and/or buying low-quality, money-losing companies at extreme prices are either (1) ignorant to market history, or (2) understand the history but are rationalizing today’s dislocations with “this time is different” or, (3) they simply believe they are smart enough to get out in time.

Let’s take a look at the big picture of U.S. stock market valuations that are more excessive than they’ve ever been in history exceeding even the pre-Great Depression peak at the end of the Roaring Twenties and the Dot-Com Bubble Peak.

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VIDEO: The Intersection of Asset Prices, Cash Flows and Returns

I came across an extremely relevant and appropriate quote recently, “Nothing so undermines your financial judgement as the sight of your neighbor getting rich.” – J.P. Morgan (h/t Jesse Felder)

It’s been a while since I’ve made a video, but, given the conversations I’ve been having as of late, it’s time.

How do you know if an asset is cheap, expensive or fairly priced? In this new presentation, I walk through valuations, how they’re calculated, what has made them so reliable for predicting future returns, and why we need to constantly remind ourselves of this principle when the temptation to chase performance in overpriced, poor quality assets grows strong.

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Putting $6 Trillion “Stimulus” in Perspective

The most recent COVID relief bill was signed by President Biden yesterday. In one year’s time our government (two different administrations) has passed about $6 trillion worth of stimulus. We’re so used to “trillions” being thrown around I believe we’ve become numb to the mind-blowing magnitude of it all so I’ll try to put it in perspective:

  • $6,000,000,000,000 (that’s twelve zeros) divided by a population of 330 million is about $18,000 for every man, woman and child.
  • The average household is about 2.5 people (130 million households) so $6 trillion of stimulus is about $46,000 for every household on average. For our family of five, it’s about $90,000 (no, we didn’t get any of that).

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S&P 500 “Line in the Sand” and Rotation Out of Growth Stocks?

It appears a line has been drawn in the sand at $3,900 on the S&P 500 as the widely-watched index has crossed that level several times over the last month (see chart below). Thus far, the S&P 500 has been directionless since the beginning of February.

Over the weekend, I assumed Senate passage of the $2 trillion “relief” bill, and likely passage in the House this week, would have been sufficient to thrust the S&P above 3,900. However, so far, even that has not provided enough fuel to support the next leg higher. Has the market already priced this in? A “buy the rumor, sell the news” dynamic? Continue reading “S&P 500 “Line in the Sand” and Rotation Out of Growth Stocks?”