The U.S. stock market is just dang expensive. There’s just no other way to say it. The trailing PE ratio is over 30. The only other time it was this expensive was during the financial crisis of 2008-2009 and the dot com crash of the early 2000s. The cyclically-adjusted CAPE ratio sits near 38. Once again you have to travel back to the early 2000’s to find U.S. equities at that level. What followed was the lost decade for U.S. stocks. Meaning, they delivered a big fat zero over a decade. Keep in mind that the CAPE ratio has no ability to predict short term performance, but it does suggest muted returns over the next decade. Younger investors might ignore valuation as they have time to wait things out. Retirees might slant to more value stocks.
Here’s the link to the CAPE ratio chart on multpl.com. And here’s one courtesy of the Financial Post …
Take a look at the lost decade for U.S. stocks.
These days, when you own the U.S. market you’re picking up a 3.3% earnings yield. We’ll need a lot of earnings growth to support stock prices and to drive stock prices even higher.
CAPE and forward returns
Take a look at the historical returns for stocks at various CAPE ratios. Over shorter periods there is often little effect. But once we get into 5-year periods and beyond, those slim earnings yields begin to bite.
Slanting to more value stocks
Here’s the most obvious route to owning more value stocks. Slant to less of the expensive market and pick up more of the less expensive markets. We’re often back to a global balanced portfolio as a solution …
On the Canadian ETF Portfolio page you’ll see that you can own the Japanese, European and British equities by way of iShares (XEF.TO).
For the Canadian market you can look to iShares TSX 60 (XIU.TO) and BMO’s Low Volatility ETF (ZLB.TO).
For one looking for a serious value tilt in Canada check out the Beat The TSX Portfolio.
U.S. value tilt
For the U.S. market, I like the idea of continuing to hold the U.S. market (XUU.TO) and then adding in a more value-oriented ETF or U.S. stocks.
The popular Schwab U.S. Dividend ETF (SCHD) is a nice option for U.S. Dollar accounts, as is Vanguard’s (VYM). The trailing PE ratio for SCHD is about 18.5 while VYM sports a 20 handle.
When I sold my BCE stock in early 2024, I kept the funds in Canadian dollars and moved the funds to iShares U.S. Quality Dividend ETF (XDU.TO). I soon sold the rest of BCE, half of my Telus, I trimmed most of the Canadian stocks and made XDU the largest position in my Canadian Dollar RRSP account. The trailing PE ratio is 19.9.
The Vanguard Value ETF (VTV) is also at a 20 PE ratio.
You could also look to a small cap value ETF such as Vanguard’s (VBR).
Once again, a young accumulator might stay the course. They can wait out any valuation reset. Retirees might consider curbing their enthusiasm for expensive U.S. stocks.
Of course, as always, the above is not advice but an idea for consideration.
Be sure to understand all tax consideration. Invest within your risk tolerance level.
U.S. stock portfolio
This week on Seeking Alpha, I posted the results for our U.S. stock portfolio …
Our Real-Life Market-Beating U.S. Stock Portfolio, Ten Years After.
I managed valuation risk by trimming the expensive U.S. stocks moving the proceeds to more value-0riented holdings such as Berkshire Hathaway (our largest position), Lowe’s and more. Some of the proceeds also went to bonds and cash and gold, given that I’m semi-retired and my wife will retire within 3-4 years.
More Sunday Reads
Dividend Hawk had a busy week with earnings reports for his companies, and the dividends received. We both hold Pepsi, one of my favourite defensive stocks. Though it is under pressure due to weight loss drugs and more …
PepsiCo, Inc. (PEP) Reports Fourth Quarter and Full-Year 2024 Results; PEP reports Q4 Non-GAAP EPS of $1.96, up 10.1% versus prior year and $0.02 ahead of estimates. Revenue of $27.78 billion misses analyst estimates by $110 million and decreased 0.3% versus the same quarter last year. For 2025, Management expects a low-single-digit increase in organic revenue, a mid-single-digit increase in core constant currency EPS and total cash returns to shareholders of approximately $8.6 billion, comprised of dividends of $7.6 billion and share repurchases of $1.0 billion.
You’ll find a dozen or more earnings summaries in Hawk’s report.
Bitcoin and bonds
At Banker on Wheels BlackRock (BLK) is announcing a bitcoin ETF launch in Europe. Fine by me says this investor in bitcoin and BlackRock.
Also in the mix, Vanguard has a positive outlook for bonds.
Given the many recent questions from readers I tidied up and rewrote my post – bonds are the adult in the room.
Fritz at the Retirement Manifesto offeres ‘I am rich and I have no idea what to do with my life’. It’s the story of a young and successful entrepreneur who struck it rich by selling his company. He now struggles to find purpose and happiness. It’s a good read.
Money can buy happiness, but it’s not always the case. It’s an afflication that is not exclusive to young ‘retirees’. Money sets the table, but retirees also need a Life Plan. We need a life filled with purpose, friendships, a certain level of ‘busyness’ and throw in ample amounts of exercise, nature – all in the camp of a healthy lifestyle.
We’ll cover and study the Life Plan in Retirement Club. Check out our new logo, thanks to Giant Mike, my talented art director partner from a century ago.
Use that Contact Dale button if you’d like to get on the waitlist for Retirement Club 2, it will set sail in March or April. It’s a series of monthly Zoom calls, newsletters and an online community space (our private island).
Retirement cash flow plans
At Findependence Hub, a look at the cost of overspending in retirement. Milestones Retirement Insights (a free retirement cash flow planning tool) looks at an Alberta couple that has been overspending. That couple can benefit from an optimized cash flow plan.
I am testing and researching the many retirement and cash flow calculators available, but I could use some help. If you’re up for being a calcultor helper, please send me a message.
And here was an interesting poll I ran on Twitter / X. Article on the topic to follow. So many costs can disappear in the retirement years.
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