When will the stock bubble burst?

[Toro]

For example, the PE ratio of the S&P 500 is estimated to be around 19x. That's currently its long-term average. In 2000, PE for large cap growth stocks was 32x and the NASDAQ was around 100x. That's a bubble. What is going on in the stock market isn't anywhere similiar (unless you're looking at biotech or fixed income).

A 19x PE is the average of the last 20-25 years. The average PE for the last century has been ~16x.

BTW, since you seem to know something, the Street distorts the perception of market valuation by focusing on forward operating earnings. By that measure, the market is trading at 15x-16x "imaginary" earnings.

But that's an illusion.

One can argue, however, that using forward operating earnings has the benefit of reviewing the future earnings most financial analyst are most interested in because reported earnings may be depressed or even inflated by one-time accounting gains, such as litigation or whatever.

Operating earnings are always inflated up. It makes stocks look cheaper than they really are.

When I was first trained as an analyst - as I assume most, if not all, analysts are - I was trained that one charge on a company's income statement may be a one-off and not reflective of profitability (though should be amortized over time). However, repeated charges were reflective of profitability since the charges represented wasted capital, usually by bad management, and thus reduced profitability of the company. In an index, those "one-time" charges taken by companies in aggregate represent wasted capital in the broader economy and should be included in the profitability of the market.

It's the single biggest mistake investors make.

 

[Toro]

Stocks aren't in a bubble today but they are certainly expensive, more expensive by some measures than at any time other than during the Tech Bubble.

In general a PE above 20 is considered overvalue. The last I heard is S&P 500 index has already reached 22.
Within that set it is possible that some shares are at fair value or undervalued, but they must be cherry picked. Something which pension fund managers don't usually do.

Valuation is getting better every day!

Earnings of the SP500 were $94 the last time I checked. That probably underestimates true earnings power, given the destruction in the commodities sectors and the strength of the dollar. But even at $100, stocks are 19x, which is expensive. At this level, the expected returns of stocks over the next 30 years is 6%-7%, below the long-term average of ~10% but still better than most other assets.

I continued to cover my shorts today.

 

[HenryBHough]

Don't buy until the Dow falls below 9,500. You know in your heart He can get us there as part of His legacy!

 

[EdwardBaiamonte]

It's the single biggest mistake investors make.

Oh right, and if they were Harvard trained Ph.D's who knew better than to make big mistakes they would simply get rich by predicting where stocks were going!!

 

[CultureCitizen]

No , but they are higher than the two previous bubbles: 1973 and 2008.

There was no stock market bubble in 2008. That was a housing bubble. There definitely wasn't any stock market bubble I recall in the 1970s.

You are probably too young :

1973–74 stock market crash - Wikipedia, the free encyclopedia

At this point, I'm certain you'll never understand what a stock market bubble is…

Show me one single link which considers a PE above 22 to be fair value and I'll eat my words.
Else, go on and buy some stocks.

S&P 500 Q3 Earnings Results: Market Overvalued

I never said stocks were fairly priced. If anything, I implied that stocks were overbought/priced. I did, however, repeatedly say that an overpriced stock market is not the same as a bubble stock market. Overpriced involves equities with current stock prices that fail to justify their earnings outlook, which means you're overpaying for the stock. Stock prices are merely a reflection of earnings, and they increase when investors expect earnings to grow. If earnings aren't growing consistently to match the rapid increase in the stock price, that is a bubble. As I've stated previously, you've had plenty of stocks in the late 90s with IPOs that didn't make a single profit, but their prices grew rapidly. These stocks dramatically grew in price only because people were buying into their ideas.

There is something you should probably know (if you haven't already made a decision to get inside the market).

1) There is no way actually to time the crash or to known if a crash is on the horizon, whether you're implementing a buy-and-hold strategy (which means being invested in the market at all times) or whether you're using a market timing approach. Fundamental investors often attempt to time the market -- by leaving during a downturn and entering again when stocks pick back up -- if they believe the market is overvalued on a fundamental basis. However, stocks can't be predicted with precision to make such moves, at least, not without different return outcomes and tax consequences.

2) Market risk (rise and fall based on the value of an investment) is the risk you face simply by being invested in stocks. These risk can be mitigated simply by holding for longer periods of time, as the growth benefits of the stock start to kick in.Even if you think stocks are going to crash, being well diversify can mitigate these problems.

3) Even if you believe stocks are overpriced, what do you do? If your time horizon is very long (10 years or more), this is irrelevant to you. If you're a short-term investor, what else can you possibly invest in. Everything else is priced fairly high as well. There are no other asset classes where you are going to get a deal on. Besides, selling short-term makes you more vulnerable to tax consequences.

1)You can't pin point the date of a crash , but you can certainly see when one is comming.
Tell me you didn't saw the 2001 crash comming. Did it cought you by surprise ? ( maybe it did, but again the only explanation would be you were very young).
Now according to your chart there was a bubble in 2008, as oposed to your previous comment, so just make up your mind.

2)The risk mostly comes from not watching the general state of the economy and reading the accounting statements of the companies.

3) In some cases it is better to hold your money for a while and invest after the crash, or invest part of your money in gold and silver if you see a crash is very near ( I did get some luck with the silver hike during 2009 , though I should probably have waited a bit longer).

 

[EdwardBaiamonte]

1)You can't pin point the date of a crash , but you can certainly see when one is comming.
.

Of course that's 100% stupid since the smartest investors don't make any more money than the dumbest. Pretending you can predict the future is a fools errand.

 

[Uncensored2008]

There is currently no stock market bubble…

Obama Akbar indeed, Comrade.

 

[EdwardBaiamonte]

3) In some cases it is better to hold your money for a while and invest after the crash,.

total illliteracy, in all cases it is better invest after the crash

 

[EdwardBaiamonte]

if you see a crash is very near.

total illiteracy given that if you could see a crash coming there would be no crash because others would see it too.

 

[Toro]

if you see a crash is very near.

total illiteracy given that if you could see a crash coming there would be no crash because others would see it too.

You assume that people are looking for a crash.

 

[EdwardBaiamonte]

if you see a crash is very near.

total illiteracy given that if you could see a crash coming there would be no crash because others would see it too.

You assume that people are looking for a crash.

no I assume if you see a crash coming others see it coming too as per culturecreeps statement above.

 

[percysunshine]

.
"When will the stock bubble burst?"

It kind of depends on what the definition of the word 'bubble' is.....

.

 

[EdwardBaiamonte]

.
"When will the stock bubble burst?"

It kind of depends on what the definition of the word 'bubble' is.....

.

and what the word burst means and even more stupidly it assumes someone can predict the future

 

[CultureCitizen]

if you see a crash is very near.

total illiteracy given that if you could see a crash coming there would be no crash because others would see it too.

Ed,
I know very few people who manage their own stocks, let alone pay attention to macroeconomic indicators and read financial statements. In order to have some success in stock investments you must be able to do those three things.
More sofisticated investors know how to do a lot more and yes, they are quite good at predicting stock crashes and bubbles.
By the way the 2007 crash was predicted at least by Peter Schiff and Steeve Keen . Indeed , there was a crash in spite of the fact they warned about it .

 

[CultureCitizen]

.
"When will the stock bubble burst?"

It kind of depends on what the definition of the word 'bubble' is.....

.

I would say a bubble is when stocks depart from the fair price fueled by speculation and not actual company performance.
IMHO stock options have already departed fair price. Crashes rarely mean a return to fair price and usually stop dropping until they become undervalued.

 

[EdwardBaiamonte]

In order to have some success in stock investments you must be able to do those three things.

of course that is hopelessly absurd stupid sad and frightening. The best full time experts in the world do no better than a monkey throwing darts.

 

[Toro]

if you see a crash is very near.

total illiteracy given that if you could see a crash coming there would be no crash because others would see it too.

You assume that people are looking for a crash.

no I assume if you see a crash coming others see it coming too as per culturecreeps statement above.

That assumption is wrong.

 

[Toro]

In order to have some success in stock investments you must be able to do those three things.

of course that is hopelessly absurd stupid sad and frightening. The best full time experts in the world do no better than a monkey throwing darts.

I'm a full-time expert, and have compounded at 9% a year above the SP500 since 1998.

Sorry.

 

[EdwardBaiamonte]

In order to have some success in stock investments you must be able to do those three things.

of course that is hopelessly absurd stupid sad and frightening. The best full time experts in the world do no better than a monkey throwing darts.

I'm a full-time expert, and have compounded at 9% a year above the SP500 since 1998.

Sorry.

dear, nobody was talking about you!! The fact remains
the best full time experts in the world do no better than a monkey throwing darts.

 

[Toro]

In order to have some success in stock investments you must be able to do those three things.

of course that is hopelessly absurd stupid sad and frightening. The best full time experts in the world do no better than a monkey throwing darts.

I'm a full-time expert, and have compounded at 9% a year above the SP500 since 1998.

Sorry.

dear, nobody was talking about you!! The fact remains
the best full time experts in the world do no better than a monkey throwing darts.

I'm a full-time expert, SpecialEd. This is what I do.

And your presumption is wrong.

But I sympathize because many "experts" don't beat the market.