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Historic indicators show stocks are on a dangerously high level

JohanVIA · 9 · 2737

JohanVIA

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If you study the history of stock markets, you find that prices swing wide from time to time,
but in the end always return to a mean value. That is why it is time to become cautious about
the present price levels: all warning lights are flashing.


There are several ratio’s used to see on what level the stock markets are in historic perspective.
One, market cap over GDP, shows the total value of all the companies versus the total economic production of a country.

Continue on my blog.. http://bit.ly/StockHigh


bauer

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^ There was a study conducted by an old investment company in the US that is based on a 100-year data and the mean average for stock market cap to GDP was 65% but the same report stated that at current period, it is indeed double the historical mean.

For Shiller's PE ratio.  The highest recorded was 40 plus before the stock market declined rapidly.  There are studies that state current PE ratio is between 20-26 such a wide difference in assumptions. 

Did you made a study on the local stock market?  How is our total stock market cap compared to GDP?  period covered if such a study was done?


JohanVIA

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Interesting Bauer, do you have any links to that study? Differences can be caused by many variables but as I understand it does not change the conclusion I made.
I usually try to find the most reliable data sources, like Moody's, Bloomberg etc since there is also a lot of outdated- or just plain wrong material going around (not trying to say yours is).

Regarding the Schiller: there are two Schiller ratio's. I am talking about the Schiller PE-10, which is widely regarded as the more reliable one since it takes a 10 year period into account. The Schiller PE (not 10) is not a very reliable indicator for market level.

http://bit.ly/Schiller-PE10

 


JohanVIA

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"Did you made a study on the local stock market?  How is our total stock market cap compared to GDP?  period covered if such a study was done?"

Good question. I will make a separate topic for the answer to that question.


TSO

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So, what can you do?

A lot of industry professionals are aware the printing presses in Japan and the US and austerity measures within Europe served only to kick the can down the road and avoid the gut-wrenching political decisions.

If the markets are already irrational and are banking on expectations management by the bankers and economists, won't your clients get pissed off at you if you underperform the broad indices on the basis of investment returns (vs risk)? Won't you be forced to be invested anyway just so you can keep your AUM in your bank accounts and not someone else's?


ferrariEverest

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They have been dangerously-high since 2008-2009. But what can we do? They want to wind it up and twist it even more.

Don't be aggressive in soliciting funds. Stay invested but keep serious tabs of what's been happening. Keep our ears on the ground. Play with the script or the song until it ends.


JohanVIA

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@TSO
"If the markets are already irrational and are banking on expectations management by the bankers and economists, won't your clients get pissed off at you if you underperform the broad indices on the basis of investment returns (vs risk)? Won't you be forced to be invested anyway just so you can keep your AUM in your bank accounts and not someone else's?"

This scenario is exactly the cause of many big moves on stock markets. Since the craziness about quarterly performance measurement, fund managers are dead scared to underperform. But not related to the index. But to their peers. Since that can cause clients to change. So everybody sticks with the herd. Nobody dares to have different opinions. Since if you are wrong, you underperform your peers. So the massive funds of institutional investors (70% of stock holdings in the US) moves the same way at the same time.
And yes, that is the same reason why everybody stays invested. If you have a mediocre performance over half of the capital, it is even worse.


Wills

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@TSO
"If the markets are already irrational and are banking on expectations management by the bankers and economists, won't your clients get pissed off at you if you underperform the broad indices on the basis of investment returns (vs risk)? Won't you be forced to be invested anyway just so you can keep your AUM in your bank accounts and not someone else's?"

This scenario is exactly the cause of many big moves on stock markets. Since the craziness about quarterly performance measurement, fund managers are dead scared to underperform. But not related to the index. But to their peers. Since that can cause clients to change. So everybody sticks with the herd. Nobody dares to have different opinions. Since if you are wrong, you underperform your peers. So the massive funds of institutional investors (70% of stock holdings in the US) moves the same way at the same time.
And yes, that is the same reason why everybody stays invested. If you have a mediocre performance over half of the capital, it is even worse.

What's your opinion on Index fund here in PH?


JohanVIA

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@Wills: to make sure we understand each other well, I was in the above not talking about index funds but mutual funds.
The above is not valid for index funds.

Sorry but I have no opinion on index funds in the Phils since I have never studied them.

In general I can only say that the fees an index fund should charge can only be very limited (far below 1%)  since they have very little wok to do;  no research, just making changes in the portfolio or a periodical basis if there are changes in the index calculation.
In the US most index funds have a better performance than mutual funds. However, over time you will still only have probably a 5.5% gross return per year.


 


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