vincent_c wrote: ↑Mon Dec 07, 2020 1:00 am
SomeDude wrote: ↑Sun Dec 06, 2020 10:57 pm
Smith1776 wrote: ↑Sun Dec 06, 2020 10:34 pm
I love the assortment of indicators. That kind of data has always been my jam.
It seems though that there's no inclusion of interest rates into the valuation. I personally think that when one factors in the current low interest rate environment, stock valuations are perfectly reasonable. Maybe even a little on the cheap side.
Why do you think these ultra low rates make these incredibly high valuations seem cheap? Do you think that means stocks are likely to have good long term returns in the next ten years or just relative to bonds?
Didn't buffet say "in the short run, the stock market is a voting machine, in the long run it's a counting machine". Where will the earnings come from to justify these prices?
I totally concur and the issue comes down to the way stocks are valued based on a discount rate which is assumed constant over the period of cashflows.
Using current interest rates might be agnostic so that there is equal odds of interest rates rising or falling but this again brings us back to the negative rates discussion.
Do not forget, from a stock market (and gold) perspective, nominal interest rates are not the proper metric. It's always real interest rate that matters. As long as we are in a negative real yield environment the sky really is the limit for stocks. There is technically infinite upside in a negative yield environment. And eventually when real yields do turn positive and start going up (will the Fed even let that happen?) obviously we will have a strong 2000 like re-valuation. But for the moment, given poor demographics, historically high debt loads, and a global trend towards yield curve control that the Fed would likely turn to if rates did start turning positive again, I would say the likelihood of that happening in the next few years is low. Not impossible, but extremely low.
Now, yields have been turning less negative in recent months due to increasing economic expectations. A "reflation" is being priced into the market over the next ~2-3 quarters, which makes sense since 2020 left a real low bar to beat as well as historically strong pent up demand that will be unleashed in a post-vaccine world. This is the reason why gold has been struggling but stocks have not. Stocks don't just have the interest rate factor, they also have the economic factor. Since the economy is looking up the next few quarters, stocks can ignore rising yields and still rally, mostly through the most "oversold" "value" stocks and sectors playing catch up. Gold on the other hand is going to continue to struggle through the reflation, as rates continue to go less negative. But, the "reflation" is likely just a countertrend move in the broader deflationary cycle going back 13 years now, not unlike the counter-trend reflation in the 2017-2018 timeframe. I fully expect the deflationary trends to take back hold in the next year or two. I just don't think long term yields are going to come this close to 0 and not actually touch it. I think 0% 10 and 30 year yields are inevitable, and that will be good for both stocks and gold... at least until we hit 0. If rates don't go negative (ie they stay at 0) and deflation continues, that leads to a rising real interest rate even though nominal rates are stable... and that is when reality could really sink into stocks (and gold would also have a real bad time). The thing to fear isn't negative rates, its yields hitting 0 across the curve and stopping. If the Fed didn't go negative, this would basically be forced austerity.
That's just my .02 though. I don't think there is any evidence that the deflationary trend is over yet, and given poor demographics and historically high debt loads, I think one would have to assume this "reflation" is just a counter-trend mean reversion like 2017-2018 and not the beginning of a new secular trend. And until the Fed (inevitably) starts doing direct debt monetization (MMT), which likely doesn't happen until we hit that 0 bound and real interest rates start going up (and all the pain that will cause starts to be felt) I don't really think it likely that the secular stock bull market is over (and why I also don't think the new secular bull market in gold has even made it passed maybe the 2nd or 3rd inning at most).
One final argument, if the bull was strong enough to not only survive COVID with all the lockdowns and everything.... but strong enough to have this crazy V shaped rally and close the year positive, why on earth would it just suddenly just keel over and die now? The bull is still too strong. It's got much further to run before it's going to be ready to give up the ghost. Corrections of course will happen along the way, and now would be a good healthy time to have a correction. But valuation be damned, the bull has much further to go.
