US stocks and Global stock index funds are expensive by any measure. But does this mean we should wait until a pullback in order to invest? In this video, we look at valuations at the moment and what we should do about it. Should we hoard cash, waiting for better opportunities, move our money into cheaper markets, or do nothing? This video is sponsored by Trading 212, a UK commission-free investment platform. Let's begin by looking at valuation right now. If we look at the US price-to-earnings multiple, so this is the price of the S&P 500 Index divided by the forecast profits over the next 12 months, currently it's at elevated values. We're paying about $21 for every forecast future dollar of profit over the next 12 months. If we compare that with recent history, we're above the 5-year average and we're above the 10-year average, those are the dashed green lines and the dashed blue lines you can see on the graph. Now, stocks aren't as expensive as they were

by this measure, in 2020, that was definitely a period of euphoria. But they are expensive. If we look at another measure, this is one which is favored by Warren Buffett, where we take the total value of the stock market, its market capitalization, and we divide it by the GDP of the United States. In fact, we use the GNP, which also takes into consideration profits generated by companies outside the United States. What you can see here is that in the top panel, gradually, that valuation has been creeping upwards, such that currently it's at a value of about 200%. So again, by this Buffet indicator, US Stocks look expensive. If we look at the bottom panel here, I've divided my Global GDP, and even there, you can see that the US is looking expensive. The US market, the equity Market's worth about 50 trillion Global GDP is about 100 trillion, so even that measure is looking pretty toppy. However, not all aspects of the US market and markets globally are expensive. For example, if we look at the

price-to-earnings multiple. This is the forward multiple, again, so we take the price of an index divided by the forecast 12-month profits for that index. Comparing across different countries, here you can see that only India is more expensive than the US. Indian investors are willing to pay 24 rupees for every rupee profit. But there are lots of countries at the bottom of this table where valuations look much more reasonable, notably the UK. There, the forward price-to-earnings multiple is just over 11. And of course, we've got countries where there are geopolitical problems, for example, China, which is in the middle of a trade war with the United States, which shows no sign of abating. And whoever wins the November election in the United States is not going to ease off on that trade war. Then we've got countries like Germany, which had just come out of a recession and which has seen pretty poor growth, but its equity market valuations are also depressed. So there we're looking at a 12 times forward multiple. So certainly looking across countries, we can see

places where valuations look more reasonable than in the US and India, and in some of those cases, I think there's a case to be made that you can be contrarian. You can tilt your portfolios to those regions by buying an index fund, which buys stocks in that country. And possibly that could outperform even drilling into the expensive US market. And breaking it down by the size of company. And here we're talking about market capitalization. You can see that for small caps, these are small US companies. That's the lines you can see at the bottom of this graph. So the S&P 600 is a small cap index, the S&P 500 is large caps, and S&P 400 is midcaps. For the midcap and small cap indices, notice how the valuations are much lower than they are for large caps. So instead of a 21 times multiple, we're talking about multiples of 15 times and 14 times for midcaps and small caps. So certainly the US small cap market is pretty unloved at the moment, and that hasn't always been

the case. If you look back in history, you can see examples when the difference between those three valuations was almost zero. And to see such a large dispersion between small cap and large cap valuations, you have to go all the way back to before 2000. So, another pocket of value is US small caps. Although I've held a Small Cap Fund in the US for some time now, and it's taking a very long time to recover. So, if you are contrarian, remember you also have to be patient. Breaking it down by US sector, again, it's not the case that all sectors are expensive. Certainly, Tech is expensive because the AI narrative has been pushing up valuations. So, Tech is trading at a 28 times multiple. But if we look at financials, basic materials, utilities, all of these are looking much more reasonable in terms of their valuations. Today's video is sponsored by Trading 212, a UK commission-free investment platform. And I use Trading 212. I've been using it for some time for my fund portfolio, but it's not just

about buying stocks and funds. If you're not ready to take that much risk, Trading 212 also offers a Cash ISA. As I make this video, the cash return on Trading 212 is 5.2%, but of course, it's variable, so check when you're applying for an account. The interest is paid daily. There's no minimum invested amount, and of course, you can withdraw your cash at any point in time. Furthermore, Trading 212 has launched the Trading 212 card, and that offers you 1.5% cash back on all your transactions until the 1st of October 24. And if you do use Trading 212 for shares and funds, it has lots of innovative features like pies. These are like portfolios within your portfolio where you can rebalance just at the click of a button. So if you have a particular strategy, you can make a pie. Furthermore, you can publish your Pi so other people can see it, and you can look at other people's pies for inspiration for your own portfolios. Now viewers of PensionCraft get a special offer from

Trading 212, where you can claim free fractional shares worth up to £100. All you need to do is to create and verify a new Trading 212 account, fund it with at least a pound, and then use the promo code, which is my name, Romen. Alternatively, use a link in the description below. So, it is possible to find unloved parts of the US Equity Market, either by market cap or by sector. But the key problem with holding back money from stocks when they're expensive is that valuation is not a good timing signal. Because what I'm hearing a lot at the moment, speaking to people one to one, is they say, Look, I've got this lump sum, and I don't want to invest because I think that markets will fall. And that's because they're looking so expensive and concentrated in the United States. Now, if valuation was a good timing signal, if it was the case that when stocks were expensive, you could just stay in cash and wait until they get cheaper, sure, that would be a good strategy. But is

that the case if we look at a valuation measure in the United States called the EXs Cape yield, and that's what you can see in these two graphs. On the x-axis, I've highlighted when stocks start off expensive or cheap, and then I've followed the stock market, the S&P 500, over the following decade. And then I've tracked the Returns on the S&P 500 over the next one year or 5 years. Notice how over a one-year period, expensiveness or cheapness makes almost no difference to the returns. You have to wait 5 years for expensiveness to affect stock returns. So again, if you are a value investor, you've definitely got to be patient. And the second consequence of this long time period for valuation to affect return is that it's a very poor timing signal. So let's do a little experiment with the S&P 500. Let's look at the loss you'd suffer if you held back money from the stock market. So what we're going to do is very simple. Every month, we'll

either move a dollar into the stock market, or we'll add it to our cash buffer. If stocks are expensive, we'll keep on adding to our cash. When stocks become cheap, we'll take the whole of that cash buffer and invest it in the stock market. So we'll only buy stocks if they're cheap. How are we going to measure cheap? Well, we'll use the EXs Cape yield again. So if we look at that EXs Cape yield for the United States going back to 1880, you can see the 70th percentile here. What that means is that if we're below the 70th percentile, because low excess Cape yield means stocks are expensive, if we're below that 70th percentile, then stocks are defined as being expensive. Now we have to define some threshold for cheapness or expensiveness. So I've used that 70th percentile. In fact, for this analysis, I tried every single percentile to see which would be best, but for that 70th percentile, what I've compared here is

all 30-year periods in the United States since 1880. I've compared 100% Equity strategy with the strategy when you hold back money from the stock market when it's expensive. So, the yellow line is you just keep 100% in stocks, and the blue line is the hold back strategy. Notice how most of the time the return on the yellow line is above that of the blue line, so holding back money from the stock market seldom worked. There were some periods when it worked, for example, the periods ending in the late 1950s, but it is very unusual. In fact, using any threshold for expensiveness varying from always hold back money to never hold back money never really worked. The median case was always worse in the hold back strategy. Now, this is simply a consequence of the fact that stocks generally drift upwards, so 100% Equity strategy is pretty good. Secondly, the fact that valuation is a poor timing signal. It doesn't tell you when to hold back money from the stock market. Markets can continue to be

expensive for a long period of time, while returns remain very good. But if you are feeling scared, and I'm assuming if you're watching this video you are feeling scared, then perhaps what you should be thinking is maybe I should re-evaluate my attitude to risk. Because if you're always scared about Equity markets pulling back, then you'll always be scared. There's always a compelling reason why stocks are going to suffer a crash. You can just look at the stats of all the YouTube videos where people are always warning about these crashes. But if that is something that really worries you, then perhaps you should have less risk in your portfolio. And that means instead of investing in things which are risky like alternative assets or perhaps stocks, you have things which are less risky but also give you a lower return. That's the sacrifice you'll make. So if you're really cautious, you'd go for money market funds. And if you're willing to take slightly more risk, you'd go for bond funds. They tend to give you a slightly higher return for taking

duration risk. But if you're living in perpetual fear of a crash, then certainly diversification should be on your checklist for your future portfolio reviews. And the time to review your attitude to risk is not to put out the fire once it's already started. Once equity markets have fallen and maybe you sold and panicked during a crash, the time to sort out your attitude to risk is before that happens, because you can guarantee there will be a pullback at some point. So just make sure that you're comfortable with that possibility and drisk your portfolio such that if there was a pullback, you wouldn't suffer such a large fall. You've got the additional benefit that you'd also have dry powder, such that you could invest back into stocks if there is a tumble. So in conclusion then, I'd say the most important thing is to find a portfolio and a level of risk that you're happy with long term. Holding back money from the equity market because valuations are high is generally a bad idea, but it's

never the case that everything is expensive at once, so you could tilt towards things which are cheaper. Personally, I do this in my fund portfolio, not my core portfolio. I just stay 100% allocated to equity in that. But as I always say, don't copy what I do because your attitude to risk will not be the same as mine. So I think the best strategy is usually simply to keep calm and carry on. If you are saving as you earn, then carry on doing that whether there's a crisis or not. If you do have a large amount of money to invest, will maybe drip feed it if you're worried about a crash. But holding back money from the equity market because we can't time markets is usually a bad idea. Now don't forget to get our offer from Trading 212. Pensioncraft viewers get a special offer where you can claim free fractional shares worth up to $100. Just create and verify a Trading 212 account, make a minimum deposit of $1, and use the promo code romen, my first name.

the link in the description below. And as always, thank you for listening.

Invest Now Or Wait For A Stock Market Crash?

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

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