Not Everything Is Expensive If You Know Where to Look

Investors love to complain that asset prices are too high, but they have only themselves to blame.

Investors bid up the S&P 500’s price-to-earnings ratio to 26.8 at the end of 2017 from 11.1 when the 2008 financial crisis eased in February 2009, based on 10-year trailing average positive earnings from continuing operations.

They drove down yields on the Bloomberg Barclays US Corporate High Yield Bond Index to 5.6 percent at the end of 2017 from 16.1 percent in July 2009. They squashed the yield on the Bloomberg Barclays US Corporate Bond Index to just 2.7 percent from 7.2 percent in May 2009. And they did the same to real estate. The FTSE Nareit U.S. All REITs Index yielded 4.1 percent as of November, down from 11.1 percent in February 2009.

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Still Bullish After All These Years

Jeremy Siegel has never lacked enthusiasm for the market.

Even nine years into one of the strongest stock market recoveries in history, “this bull market is not over yet,” said Siegel, who has been a University of Pennsylvania finance professor since 1976.

That should not come as a surprise. His 1994 book, “Stocks for the Long Run,” helped cement the conventional wisdom that stocks are a better bet for long-term investors than other popular investments such as bonds and gold.

Siegel’s timing couldn’t have been better. A year after his book appeared, U.S. stocks went on an epic run. The S&P 500 Index more than tripled from 1995 to 1999.

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The Ghost of Markets Past

The stock market is at a record high. Investors are chasing a handful of hot stocks. Geopolitical tensions threaten to upend the rally.

I’m referring, of course, to 1972. The S&P 500 Index closed at a record high of 119.12 on Dec. 11. It was the height of the Nifty Fifty (not to be confused with the Nifty 50 Index of India stocks), the idea that investors needed only to buy 50 of the most popular growth stocks and hold them forever.

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Calm Markets Are No Reason to Bid Up Stocks

Low volatility is great, but it doesn’t mean investors should pay more for stocks.

It’s been an unusually quiet time for U.S. equity markets. Stock watchers’ favorite barometer of volatility, the CBOE Volatility Index, or VIX, has averaged just 11.1 so far in 2017 through Monday, making it the calmest year on record. (The lower the VIX, the lower the volatility, and vice versa.) The gauge has averaged 19.4 since its inception in 1990.

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Rise of Indexes Threatens to Eclipse Their Creators

Index providers have won big in the great migration from high-priced active management to low-cost index funds. But their fortunes are set to turn.

The same trend that brought index providers to prominence is now coming for their profits: Investors are in no mood to pay fees. Investors plowed a net $2.5 trillion into mutual funds and ETFs that charge 0.2 percent a year or less from 2007 to 2016, according to Broadridge, which tracks data from 80,000 funds globally. That’s more than twice what they invested in all other funds combined.

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Insurrection in Excel Nation

I have a feeling that chief financial officers will miss Excel.

The Wall Street Journal reported last week that some CFOs are telling their employees to stop using Microsoft Corp.’s Excel spreadsheets for “financial planning, analysis and reporting.”

Complaints about Excel are as old as the program itself. Some of those complaints are legitimate, and Microsoft should pay heed. Until this summer, for example, Excel didn’t allow users to collaborate, a feature that Google Sheets made available free a long time ago.

Other complaints are misguided, however. Adobe Inc.’s CFO Mark Garrett told the Journal that he doesn’t want “financial planning people spending their time importing and exporting and manipulating data.” Instead, he wants them to focus on what the data means.

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Your Junk-Bond Worries Are All Wrong

There are reasons to be skeptical about high-yield bonds, but not for the ones investors have been worried about lately.

For starters, there’s little indication that investors are fleeing risky bonds for good. Yes, two of the biggest U.S. junk-bond ETFs have experienced outflows this month. Investors pulled $1 billion from the SPDR Bloomberg Barclays High Yield Bond ETF through Friday and $600 million from the iShares iBoxx High Yield Corporate Bond ETF.

But there’s nothing unusual about those outflows. The SPDR ETF experienced outflows in 30 of the 71 months since 2012, and the iShares ETF experienced outflows in 33 of those months. Both funds have also had bigger monthly outflows since 2012 than they’ve had so far in November. None of those occasions appear to have dimmed investors’ fondness for junk bonds. In fact, there are indications that money is already flowing back in.

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Calpers Needs to Think a Few Moves Ahead

The largest U.S. pension fund, the California Public Employees’ Retirement System, is chasing investing’s holy grail: Buy low and sell high.

Calpers is considering whether to reduce its stock allocation to as little as 34 percent from 50 percent and discussed it at a board workshop on Nov. 13.

The temptation to lighten up on stocks is understandable. The MSCI ACWI IMI Index — a collection of large-, mid- and small-cap companies from around the world — is up 40.2 percent since its low in February 2016 through October, including dividends. That’s well above the index’s average 20-month return of 14.7 percent since inception in June 1994.

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This Wealth Plan Beats Death and Taxes

As House and Senate Republicans pursue competing tax overhaul plans, one big disagreement is the estate tax. House Republicans want to repeal  it in 2024 while their Senate colleagues  want to preserve it.

The House’s repeal plan would be a windfall for a small number of the richest Americans. My Bloomberg View colleague Al Hunt notes that the estate tax affects only 0.5 percent of all estates. Both the Senate and House plans would double the estate tax exemption to $11 million from $5.5 million per individual, which would further shrink the percentage of affected estates.

Nevertheless, average Americans dislike the estate tax. A variety of polls over the years have shown that most Americans want to repeal it. Ipsos recently conducted a survey for National Public Radio and found that 65 percent of respondents favor repeal.

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Poor Housing Investment Gets Worse in Tax Plan

One of the more scrutinized parts of the House Republicans’ tax plan is the proposal to reduce the mortgage-interest deduction. Taxpayers can now deduct interest on mortgages of up to $1 million. The proposal would reduce the cap to $500,000.

A lot has already been written about the policy implications of such a move. It’s also worth asking, however, how it would change the financial case for owning a home. National Economic Council Director Gary Cohn told Bloomberg on Friday that the ability to deduct interest “is not what drives you to buy a house.” But it should.

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