Is the stock market over heating?

gadgetmind

blinko wrote: »

of couse the market is overheated, just look at the disconnect between earnings and valuations.

p/e ratios suggest that the market has got ahead of earnings, but only slightly.

There have certainly been better times to invest but I'm still doing my pension drip feed and our S&S ISA lump sums without any hesitation whatsoever. (OK, so S&S ISA has more cash than usual, but that's slowly being whittled down.)

SnowMan

zugzwang wrote: »

If you take account of inflation, ftse lost 40% of it's value between 2000-2012.

Cant post link, google 'Over the past 12 years the FTSE 100 index has lost 39% of its value' and you'll see graph.

So ftse, dow not really at the highs but you may still think it's overbought for now.

According to my own figures, the FTSE all share total return index in real (RPI) terms is at its highest level ever at the end of April, based on solely month end figures for the FTSE all share total return index, and assessed against RPI indices for the same month, and taking into account today's RPI release for April.

It's marginally above its end of October 2007 level on this real total return basis.

gadgetmind

While the real total return index is a useful way of know whether the markets made/lost money for investors over the period in question (*), you're better looking at the index itself in real terms (ignoring dividends) to judge market "heat".

* - Of course, this assumes the investor put everything is as a single lump sum on the first day.

IronWolf

gadgetmind wrote: »

p/e ratios suggest that the market has got ahead of earnings, but only slightly.

There have certainly been better times to invest but I'm still doing my pension drip feed and our S&S ISA lump sums without any hesitation whatsoever. (OK, so S&S ISA has more cash than usual, but that's slowly being whittled down.)

Corporate profit margins are at their highest levels ever. Some have said this isn't sustainable and means the 'normalised' PE of the stock markets is much higher.

I dont take much notice of macro predictions but its interesting. Probably a result of consolidation of lots of industries, and the rise of technology which usually commands higher margins.

SnowMan

gadgetmind wrote: »

While the real total return index is a useful way of know whether the markets made/lost money for investors over the period in question (*), you're better looking at the index itself in real terms (ignoring dividends) to judge market "heat".

* - Of course, this assumes the investor put everything is as a single lump sum on the first day.

If you are trying to look at whether the market is 'overvalued' which is what I take to mean by 'overheated' then you have to probably look at company earnings and the outlook for future earnings growth and discount the combined return of dividends and growth at the expected prospective return that equity investors expect (amongst other things). That gives you your valuation of the market.

In estimating prospective earnings growth you have to allow for earnings growth lagging GDP growth because of entrepreneurial profits taking their bite out of GDP growth.

It seems logical also that in times of low returns on alternative investments (such as gilts and savings) that equity investors will expect lower returns also in the shorter term. It is just in the noise of market movements it is not obvious that is happening. So equities aren't necessarily the solution to the lower returns on other investments.

I don't understand the effect of quantitative easing either given that it isn't a one way thing and at some time it has to be un-wound. I can only guess that quantitative easing and its unwinding is priced in now but probably wasn't before.

I take the view that the market is 'valued' about right at the moment because I know no better (and am not clever enough to try and work it out) but prices could further increase or could crash as at any time.

As a passive investor I just stay invested and cross my fingers.

redbuzzard

IronWolf wrote: »

Corporate profit margins are at their highest levels ever. Some have said this isn't sustainable and means the 'normalised' PE of the stock markets is much higher.

I dont take much notice of macro predictions but its interesting. Probably a result of consolidation of lots of industries, and the rise of technology which usually commands higher margins.

That makes sense, intuitively.

If businesses are cautious about investing, they are effectively running their businesses for cash and reducing depreciation and interest charges. That will flatter profits in the short term.

So what looks a reasonable value p/e is based on a boosted profit that may not be sustainable, or at least not easily growable.

Perhaps we should add add 10% or 20% to the p/e/ when judging market value, for now.

The same sort of argument applies to yields, where the strong profits are used to increase dividends.

pqrdef

When everybody is saying there's going to be a crash, it can't be far away. It's a self-fulfilling prophecy.

The crash will be caused by everybody trying to sell before the crash. Any sign of the beginning of a sell-off could start a panic.

So, these defensive shares. How defensive will they really be? A lot will be dumped willy-nilly when people sell off their funds and trackers.

gadgetmind

IronWolf wrote: »

Probably a result of consolidation of lots of industries, and the rise of technology which usually commands higher margins.

Recessions are good for burning off the "dead wood" and making the companies that survive more efficient.

A friend of mine calls this process when applied to excess employees as "dew*nkerisation"!

gadgetmind

pqrdef wrote: »

So, these defensive shares. How defensive will they really be? A lot will be dumped willy-nilly when people sell off their funds and trackers.

Oooo, that would be lovely! We didn't have a summer sale last year, but the one in 2011 was a cracker: as everyone ran for the exits, they dropped loads of diamonds, which I snapped up with glee.

More please!

Jegersmart

IronWolf wrote: »

Corporate profit margins are at their highest levels ever. Some have said this isn't sustainable and means the 'normalised' PE of the stock markets is much higher.

I dont take much notice of macro predictions but its interesting. Probably a result of consolidation of lots of industries, and the rise of technology which usually commands higher margins.

QE helps companies refinance their debt at a much cheaper level and this improves their bottom line/earnings. When you look at personal consumption stats you understand just how big an impact QE is having......

J