the big difference between today and the dot.com speculation of the late nineties is the former was simply speculation on unproven companies, and today, it is probably simply being overweight on a particular sector.
But as Agip points out, it is, by and large, a sector that is profitable and integral to the operation of our economy, utilities, telecommunications, etc. The tech sector today is not fundamentally speculative, though there is certainly a corner of it that is.
All of that may be true, but there’s your problem:
Value of stock market as % of GDP (“Buffett Indicator”) is off peak but remains incredibly elevated (>200%) relative to history pic.twitter.com/OJA9YJnoYQ
the big difference between today and the dot.com speculation of the late nineties is the former was simply speculation on unproven companies, and today, it is probably simply being overweight on a particular sector.
But as Agip points out, it is, by and large, a sector that is profitable and integral to the operation of our economy, utilities, telecommunications, etc. The tech sector today is not fundamentally speculative, though there is certainly a corner of it that is.
All of that may be true, but there’s your problem:
The GDP to stock market value is not a perfect metric by itself. Bond yields were higher in the past, so less money was put into the market. In recent times, people have not had any other choice that had returns comparable to equities, so equities received a larger proportion of people's money than in past decades. Also, I don't know how to prove this, but I would bet that a FAR higher percentage of the general population invests in the stock market today than in the pre-smart phone and especially pre-internet era. It's incredibly easy for anyone to download an app and get going. Even without smart phones, I started investing at age 24 when I only had a couple thousand dollars to my name using a computer. Getting started and making the effort was a lot harder in 2000, 1990, 1980, etc. All of that plus the fact everyone got a bunch of "free" money in 2020 which jacked up the market...
It is hard to know exactly where we "should" be. I cannot see us dropping another 20% though. Ten percent maybe.
The GDP to stock market value is not a perfect metric by itself. Bond yields were higher in the past, so less money was put into the market. In recent times, people have not had any other choice that had returns comparable to equities, so equities received a larger proportion of people's money than in past decades. Also, I don't know how to prove this, but I would bet that a FAR higher percentage of the general population invests in the stock market today than in the pre-smart phone and especially pre-internet era. It's incredibly easy for anyone to download an app and get going. Even without smart phones, I started investing at age 24 when I only had a couple thousand dollars to my name using a computer. Getting started and making the effort was a lot harder in 2000, 1990, 1980, etc. All of that plus the fact everyone got a bunch of "free" money in 2020 which jacked up the market...
It is hard to know exactly where we "should" be. I cannot see us dropping another 20% though. Ten percent maybe.
Yeah the stock market to GDP ratio isn't all that interesting to me. It assumes too much apples to apples economy and stock market behavior. While actually both the economy and the stock market change constantly and have vastly different characteristics one generation to another. I mean tech stocks are vastly higher margin business than energy....and since they are such a big part of the stock market, the market cap/gdp *should* be higher now. Plus all the better shareholder rights issues that make stocks safer than in the past. Plus all the profits the megacaps make from outside the US GDP.
As for where we should be, there is no logic or math in the short term. It's all just animal spirits, greed and fear.
In 2020, Meta, Amazon, Google, Apple and Microsoft collectively produced $1.1 trillion in sales, eclipsing the GDP of the Netherlands, Switzerland, Turkey and Saudi Arabia, according to World Bank data. (WSJ)
The GDP to stock market value is not a perfect metric by itself. Bond yields were higher in the past, so less money was put into the market. In recent times, people have not had any other choice that had returns comparable to equities, so equities received a larger proportion of people's money than in past decades. Also, I don't know how to prove this, but I would bet that a FAR higher percentage of the general population invests in the stock market today than in the pre-smart phone and especially pre-internet era. It's incredibly easy for anyone to download an app and get going. Even without smart phones, I started investing at age 24 when I only had a couple thousand dollars to my name using a computer. Getting started and making the effort was a lot harder in 2000, 1990, 1980, etc. All of that plus the fact everyone got a bunch of "free" money in 2020 which jacked up the market...
It is hard to know exactly where we "should" be. I cannot see us dropping another 20% though. Ten percent maybe.
None of that makes companies more valuable or prevents the return of the S&P 500 to levels of average historic valuation. To believe a new era magically appeared thirteen years ago with the invention of apps and the popularity of investing seems naive. I would argue your proposal makes the potential collapse more likely as well as severe.
In 2020, Meta, Amazon, Google, Apple and Microsoft collectively produced $1.1 trillion in sales, eclipsing the GDP of the Netherlands, Switzerland, Turkey and Saudi Arabia, according to World Bank data. (WSJ)
So, I would assume low corporate tax rates, stock buybacks fueled by Fed policies, had little to do with cyclical businesses that depend on consumer spending and advertising? I find it amusing how investors bow to technology as if there is magic in the name. Well so far in 2022 it is a curse, one I believe is likely to continue.
Couldn't disagree more. The value of a company is what people are willing to pay (and sustain over time). More buyers = more demand = higher price. With more and more people passively investing in index funds, the whole market gets lifted up above historical averages. Besides that, all the money printing in 2020 threw a monkey wrench into valuations causing them to jump higher than what they would normally be. It doesn't mean things are overvalued. It means a ton of money was suddenly injected into the system.
We are definitely not in a state comparable to the dot com bubble because back then there were tons of companies that weren't making any money, and many weren't even active real businesses; they were get-rich-quick schemes. It was tulip mania. Even if things are overvalued today (not saying they are), businesses are still legit operations for the most part. Even Tesla with it's insane P/E ratio, it's still a business that is making money. That wasn't the case back in 2000.
Couldn't disagree more. The value of a company is what people are willing to pay (and sustain over time). More buyers = more demand = higher price. With more and more people passively investing in index funds, the whole market gets lifted up above historical averages. Besides that, all the money printing in 2020 threw a monkey wrench into valuations causing them to jump higher than what they would normally be. It doesn't mean things are overvalued. It means a ton of money was suddenly injected into the system.
We are definitely not in a state comparable to the dot com bubble because back then there were tons of companies that weren't making any money, and many weren't even active real businesses; they were get-rich-quick schemes. It was tulip mania. Even if things are overvalued today (not saying they are), businesses are still legit operations for the most part. Even Tesla with it's insane P/E ratio, it's still a business that is making money. That wasn't the case back in 2000.
OK, your’s is the consensus view. Having been in the financial services business during the Tech Bubble, and with 50 years of life experience at the time, I think you couldn’t be more wrong.
Meanwhile, Bitcoin hits a new YTD low of $33,818. The NASDAQ has been moving lock step with Bitcoin.
Couldn't disagree more. The value of a company is what people are willing to pay (and sustain over time). More buyers = more demand = higher price. With more and more people passively investing in index funds, the whole market gets lifted up above historical averages. Besides that, all the money printing in 2020 threw a monkey wrench into valuations causing them to jump higher than what they would normally be. It doesn't mean things are overvalued. It means a ton of money was suddenly injected into the system.
We are definitely not in a state comparable to the dot com bubble because back then there were tons of companies that weren't making any money, and many weren't even active real businesses; they were get-rich-quick schemes. It was tulip mania. Even if things are overvalued today (not saying they are), businesses are still legit operations for the most part. Even Tesla with it's insane P/E ratio, it's still a business that is making money. That wasn't the case back in 2000.
OK, your’s is the consensus view. Having been in the financial services business during the Tech Bubble, and with 50 years of life experience at the time, I think you couldn’t be more wrong.
Meanwhile, Bitcoin hits a new YTD low of $33,818. The NASDAQ has been moving lock step with Bitcoin.
I don't care about bitcoin. Whether that's at 100,000 or 0 doesn't say much about the total stock market. The NASDAQ is worth more consideration, but again, it's a subset of the market, not the total market. Passive investors and index investors are mostly investing in S&P500 index funds or total market index funds. The NASDAQ being overvalued doesn't mean a whole lot because money tends to get shuffled around more than "vanish." Even when it gets pulled out, it gets put back in at a later date, usually just not in the same fund/stock.
I appreciate your posts, Iggy, but you're one of the biggest perma-bears/doomsdayers of anyone I've ever come across. Back in 2020 you were saying the market was still no where near lows even after we hit 2400... I believe you were calling for 1500 or below and chastised me for buying in around 2400 because you were so certain we were nowhere near the bottom. My 12 month return rate hit as high as 79%. What was yours? You can say all the things you want, but at some point the results have to speak for themselves.
“There is a significant difference between AVERAGE and ACTUAL returns. The impact of losses destroys the annualized “compounding” effect of money.”
😹
“There is statistical proof that a buy-and-hold strategy is a good long-term bet, and the data for this hold up going back for at least as long as investors have had mutual funds.”
OK, your’s is the consensus view. Having been in the financial services business during the Tech Bubble, and with 50 years of life experience at the time, I think you couldn’t be more wrong.
Meanwhile, Bitcoin hits a new YTD low of $33,818. The NASDAQ has been moving lock step with Bitcoin.
I don't care about bitcoin. Whether that's at 100,000 or 0 doesn't say much about the total stock market. The NASDAQ is worth more consideration, but again, it's a subset of the market, not the total market. Passive investors and index investors are mostly investing in S&P500 index funds or total market index funds. The NASDAQ being overvalued doesn't mean a whole lot because money tends to get shuffled around more than "vanish." Even when it gets pulled out, it gets put back in at a later date, usually just not in the same fund/stock.
I appreciate your posts, Iggy, but you're one of the biggest perma-bears/doomsdayers of anyone I've ever come across. Back in 2020 you were saying the market was still no where near lows even after we hit 2400... I believe you were calling for 1500 or below and chastised me for buying in around 2400 because you were so certain we were nowhere near the bottom. My 12 month return rate hit as high as 79%. What was yours? You can say all the things you want, but at some point the results have to speak for themselves.
OK, that is fair criticism. However, the Government spent $2 Trillion to support travel and leisure, PPP loans, stimulus handouts, and the Fed flooded the system with $5 Trillion in QE. The S&P 500 would have hit 1,500 easily if left alone. That would probably be the better policy, rather than the underwriting failed business models and speculation that got us to today. The question one should ask is if there is capacity or willingness to continue such madness. Certainly inflation has turned both Government spending plans and Fed hubris upside down. I would not be surprised if the market revisits that 1,500 level over the next year, in fact I expect it.
Best wishes on your investing. I hope you hold on to your marvelous gains.
The creator of dogecoin recently tweeted out alarmist warnings about a prospective burst of the housing bubble that has driven housing prices higher when com...