US Markets Risk

chiang_mai

Morningstar articles about investing tend to be informative rather than fluff pieces, many are an excellent trove of information. Below is an article that attempts to quantify the risk in US markets currently, supported by understandable metrics. (see the graphic entitled, Market Themometer).

"I like this chart because it packs in so much information; even without reading all the details, you can glean that six of these seven metrics currently stand at pretty high levels relative to their historical ranges. Writ large, that suggests some caution may be warranted".

The key take away is that US markets are running hot and that international diversification is now important. Those investors who "all in" or nearly so, in the US, take note.

https://www.morningstar.com/markets/what-7-key-indicators-are-saying-about-market?utm_source=eloqua&utm_medium=email&utm_campaign=improvingfinances&utm_content=none_71480&utm_id=37147

sheenas

You can take these articles with a pinch of salt. While I would agree AI investment would appear totally out of control I, and neither can these people predict the outcome or when/if a crash/correction will happen.

Being all in or even borrowing is a risk when investing and best avoided. Spending risk and only investing what you can afford is the way forward.

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/81867579#Comment_81867579

The concern is not just A! spending and Tech sector valuations, it's the overall state of the US economy and the extent to which metrics are high in all categories, except oil. Those things combined with increasingly unsustainable debt and no plan to reduce it, strongly suggest US markets caution. I have read in these pages over the past few months where some MSE Forum members have said they are almost entirely invested in the US, they are the ones at whom the article is targeted.

GazzaBloom

Several of those factors bare little to no relation to US stocks and the article is meant for people living in the US. How would such charts look for other countries such as Japan, Europe, UK?

masonic

I think I've trotted out this anecdote before, but in the late 2010s a work colleague started discussing investments with me, particularly how he'd been investing in a NASDAQ 100 ETF that had been doing really well for him. He was of the considered opinion that this was the only investment he needed, as it contained the cream of the crop, companies that had lots of things going for them (I tended to tune out when he evangelised over the details). In turn, he tuned out when I started to drone on about risk management and diversification. Then Covid happened. I was fairly oblivious to the stock market reaction in the first few days, but then my colleague started approaching me in a more and more agitated state, deeply concerned that every day his investment seemed to be falling in value, and not just by small amounts. He was eager to know what I was doing (which at the time was nothing). This carried on for a few weeks. Then one day I'd realised I hadn't heard from him in a while, so I checked in. He told me he sold out to protect the last 10% of his gains. He was in the process of transferring to a cash ISA. Since then he only discusses savings rates with me.

I would say this is really a question of risk tolerance and risk capacity. Single country and other forms of concentrated / conviction investing are high risk strategies. That's true regardless of valuation. If my colleague was willing to stay the course, he'd be up about 250% today. But he did not have that sort of risk tolerance. Neither do I. But equally, he could have still been in the red if things had played out differently. Not every crash will be a short sharp shock, followed by a quick recovery. One needs to be prepared to stay the course for decades.

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/81867608#Comment_81867608

The article concerns the state of the US economy (of which there are seven indicators), not the US markets and is intended for anyone who invests in US assets. Markets are a forward view of the economy thus I think it's useful to understand what the current view is, before understanding where it might be headed in the future. On that basis, US markets appear to be saying that the future is rosy whereas the today view is less than good. Those are two diametrically opposed views and there is no obvious plan to transition from one to the other, the conclusion being that markets are wrong.

chiang_mai

"One needs to be prepared to stay the course for decades".

I wonder how many of us would decide to stay on their current investing course, if they knew that they had to wait decades for everything to be OK and that in the meantime, things would be far from! As the author quite correctly suggests, there are obvious visible economic risks out there that investors need to be aware of and to attempt to mitigate to at least some degree. Closing your eyes and pretending things will be OK in several decades, regardless of whatever happens tomorrow, isn't sensible risk mitigation, not if you're 90% invested in the US and espcially not if you're 65 years old.

InvesterJones

It's the old valuation conundrum - we know valuations are high (and the article is concerned with market valuations, not economy), and we know over the extremely long run valuations eventually mean revert, the problem is they're a terrible timing signal - it can take several decades before mean reversion and in the meantime (pun intended) they can go even higher.

chiang_mai

https://forums.moneysavingexpert.com/discussion/comment/81867724#Comment_81867724

Their, market themometer contains seven metrics, each metric compares against the minimum and maximum over the past two decades only. I don't think the primary concern is the amount of time required for the reversion to norm. I think the primary concern is that so many of the indicators are so high when there is no obvious plan to reduce them, if anything, those indicators are worsening rather than improving. Trying to deny the link between markets and the economy seems foolish, doing so means we should no longer think of markets as a forward view of the economy and that investing in markets is done solely in a bubble.

Linton

https://forums.moneysavingexpert.com/discussion/comment/81867705#Comment_81867705

If one's investment timeframe is decades, why not? With equity investing everything will never be OK, there will always be clouds on the horizon. Continually making major changes can cause more problems than those they are intended to mitigate.

In my view short term events causing you to make major changes to your portfolio is strong evidence that your allocations were previously at too high a risk to suit your psychology or objectives and hence inappropriate.

Appropriate means that your risk is sufficiently diversified that economic events dont cause you distress.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/81867758#Comment_81867758

Linked, yes, but as the time delay is unknowable and variable, it's a terrible timing signal.