Sounds like a book title we know? Aivars Lode
By Morgan Housel
By Morgan Housel
This time it’s different.
These words are often uttered near the peak of bull markets, as dewy-eyed investors attempt to justify unsustainable market trends by arguing that the past is no longer a relevant guide to the future.
The phrase is often associated with the period just before the Internet bubble burst in 2000. The great investor John Templeton once called it “the four most dangerous words” in investing.
It is worth keeping the peril of those words in mind now. U.S. stocks increasingly look expensive, and Federal Reserve Chairwoman Janet Yellen said Wednesday that valuations seem “quite high.” When they have looked similarly expensive in the past, subsequent returns often have been underwhelming. So it is safer to assume this time isn’t different.
But there also is danger in assuming that nothing at all has changed—particularly if that conclusion leads you to make radical changes to your portfolio, such as selling all your stocks because prices might fall.
The stock market today is different in important ways, and those changes should underscore the reality that no one—including your adviser or your broker—knows what will happen next.
Today’s S&P 500, for example, bears little resemblance to the past.
When the index launched in 1957, it was comprised of 425 industrial companies, 60 utilities and 15 railroads. Today, about one-fifth of the index’s value is information-technology companies, and there are only four railroads.
Financial stocks, which devastated markets during the 2008 financial crisis, weren’t even included in the index until 1976.
The investing world is “totally different now than it was in the past,” says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. “The further back you go in time, the less things are comparable.”
How big companies spend their money also has changed in ways that affect investors significantly.
From 1900 to 1980, a diverse group of U.S. companies paid out an average of 61% of their profits as dividends, according to data from Yale University economist Robert Shiller. In the period from January 1980 through December 2014, that average was 44%, as companies used more of their profits for share repurchases and acquisitions.
All else being equal, higher share repurchases will lead to higher growth in earnings per share. Inflation-adjusted annual corporate profits per share grew nearly a full percentage point faster from 1980 to 2014 than in the eight decades prior, according to Mr. Shiller’s data.
This may not justify modestly higher stock valuations than in the past. But it should at least make you pause before predicting that market valuations will revert to a long-term average. The cyclically adjusted price/earnings ratio—which measures the S&P 500 based on 10 years of earnings adjusted for inflation—has been above its long-term average in all but 15 months over the past 25 years, according to Mr. Shiller’s data.
Investors themselves also have different options now. Individual retirement accounts and 401(k) plans didn’t exist four decades ago. At the end of 2014, they held a combined $12 trillion of savings, according to the Investment Company Institute, a fund-industry trade group.
The ease with which investors can move money in and out of the stock market stands in contrast with, say, the 1970s. When it comes to how we invest and the incentives influencing those investments, things truly are different.
The population of Americans in their 30s and 40s—which is when many people begin saving and investing in earnest—grew by 4.8 million people from 1994 to 2004, according to data from the Census Bureau. It declined by 3.3 million from 2004 to 2014. It now is forecast to rise by six million by 2024.
Tobias Levkovich, chief U.S. equity strategist at Citigroup, says in an email that the current cohort of Americans ages 35 to 39—some 20.3 million people—is actually bigger now than when many baby boomers were in that age group in the 1980s and 1990s, when their money helped push stocks higher. He considers this change bullish for stocks.
Investors comparing today’s market to the past “think they’re comparing apples to apples,” Mr. Silverblatt says, “but there’s lots of different fruit in the basket.”
