Do Valuations Matter? (EP.320)

Episode Summary

Executive Summary: The episode blends market commentary with practical investing and consumer-sentiment observations. The hosts argue that strong equity returns can coexist with frequent corrections, valuations matter mostly at extremes, and recent macro surprises—resilient labor markets, limited housing supply response, and muted credit-card stress—help explain why recession calls missed. They also discuss Robinhood, Apple, hedge funds, I-bonds, and consumer spending quirks.

Main Topics: Valuations, returns, and the limits of market forecasting (Priority: 5/5): The hosts revisit long-run valuation metrics like CAPE and earnings yield, arguing that valuations matter most at extremes and are often poor short- and medium-term timing tools. They emphasize how mega-cap tech and changing investor behavior distorted historical relationships between valuation and future returns. Bull markets still have corrections (Priority: 5/5): Using long-run S&P 500 data, they show that even strong years often include 10% drawdowns. Their point is that investors should expect volatility within up years rather than only in bear markets. Why recession forecasts missed (Priority: 5/5): They discuss the Fed, fiscal stimulus, consumer balance sheets, fixed-rate debt, and labor-force growth as reasons the economy avoided recession despite rate hikes. They also push back on the idea that the Fed simply 'talked' the economy out of trouble. Housing market dysfunction and affordability (Priority: 4/5): The conversation focuses on historically low seller activity, mortgage rate lock-in, household formation, and the psychological impact of much higher home prices and payments. They suggest the housing market may remain abnormal for years until affordability improves. Consumer balance sheets and credit card alarmism (Priority: 4/5): They challenge narratives that rising credit-card debt signals broad consumer distress, noting debt levels relative to GDP and household net worth, plus delinquency rates that remain below historical averages. Company and sector snapshots: Apple, Robinhood, and hedge funds (Priority: 4/5): They review Apple’s revenue slowdowns, Robinhood’s profitability aided by higher rates, and research suggesting hedge funds and other alternatives have detracted from public pension performance. Behavioral finance, consumer habits, and recommendations (Priority: 2/5): The episode ends with practical anecdotes about shopping returns, tipping housekeeping, I-bonds, travel-point tools, water parks, and entertainment recommendations like Hijack and Barbie/Greta Gerwig context.

Key Arguments: Strong annual market returns can still include sizable intra-year corrections; investors should plan for drawdowns even in good years. Valuation is a weak timing tool for most investors unless it reaches extreme levels; long-term, it still matters more for individual stocks than for the index. The 2010s and early 2020s delivered strong equity returns despite elevated valuations, largely because mega-cap tech growth and changing market structure overwhelmed old relationships. Recession calls failed because households had more excess savings, much debt was locked in at low fixed rates, and labor supply expanded unexpectedly. The Fed likely did not 'talk us out of' recession; instead, the economy was more resilient than expected and the inflation shock/boom dynamics faded naturally. Credit-card debt headlines need context: absolute balances rose, but household wealth, GDP, and debt service capacity also increased. Housing supply is constrained not just by mortgage lock-in but by unaffordability and move-up costs, making a quick normalization unlikely. Alternative investments, especially hedge funds and real estate, have often reduced public pension alpha rather than improved it. Higher interest rates have helped Robinhood’s net interest revenue, showing that some financial intermediaries benefit from the rate environment even if traders do not.

Data Points: S&P 500 year-to-date return: about 18% - Used to argue that the market trend is still higher despite a minor pullback Years the S&P 500 finished up 10%+ since 1928: 55 of 95 years - Historical frequency of strong positive years 10%+ corrections in years when the S&P 500 was up 10%+: 23 of 55 years - Shows drawdowns are common even in good years 20%+ up years for the S&P 500: 34 years - Long-run strong-return years since 1928 20%+ up years with a 10%+ correction: 16 of 34 years - Nearly half of large up years included a meaningful correction CAPE below long-term average since end of 2009: 0 times - The CAPE ratio never fell below its historical average in the post-GFC bull market period CAPE average long-term level: 17.4 - Shiller CAPE long-run average cited in the discussion Stock market return since 2010: 13%+ per year - Used to show how strong returns persisted despite high valuations Average U.S. home price since 1983: up nearly 500% - Illustrates long-run asset appreciation S&P 500 since beginning of 1983: up over 2,800% - Compared with housing to show extraordinary financial-asset gains Credit card debt: $1 trillion - Headline figure used in consumer-debt discussion Credit card debt increase since start of 2023: $193 billion more - Shows a sharp recent rise in outstanding balances Credit card debt increase since April 2021: $264 billion above - Contextualized as recovery from a pandemic-era decline Credit card debt pre-pandemic (Q4 2019): $927 billion - Baseline for comparison before pandemic U.S. GDP Q4 2019 to 2023: from a little less than $22 trillion to $27 trillion - Demonstrates debt growth lagged economic growth Total U.S. household net worth: from $110 trillion to $141 trillion - Shows asset growth far outpaced credit-card debt Bottom 50% net worth in 2019: $2 trillion - Used to rebut claims that household balance sheets are universally weak Bottom 50% net worth in 2023 Q2: $3.4 trillion - Shows wealth improvement at the lower end of the distribution Household survey able to cover $400 emergency with cash: 63% in 2022 - Cited in myth-busting discussion about emergency savings Households that could not come up with $400 at all: 13% - Clarifies that most households can pay somehow, even if not with cash Labor force expansion over past year: 3.1 million workers - Unexpected growth in labor force participation Labor force growth rate: nearly 2% - Rare expansion, not seen since 1999-2000 tech boom Women 25-54 labor force participation: all-time high - Women drove much of the labor-force increase New single-family home listings: 61,000 to 62,000 per week - Shows no surge in sellers despite higher rates Household formations over the last year: 2.1 million - Explains continued housing demand despite affordability issues Alternatives’ effect on public pension alpha: negative alpha of approximately 1.2% annually since the GFC - Study result on public pension performance Robinhood net interest revenue: $234 million - Higher rates boosted income more than transaction revenue Robinhood transaction-based revenue: $193 million - Down 7% year over year Robinhood corporate cash investments: over $6 billion - Cash-heavy balance sheet noted in valuation discussion Apple revenue trend: down year over year for 3 consecutive quarters - Despite stock strength, underlying revenue softened Apple Mac revenue changes: -7%, -31%, -29% - Three recent quarters of Mac weakness Apple iPad revenue changes: -20%, -13% - Recent declines in iPad category Apple iPhone revenue changes: -2%, +2%, -8% - Shows the main revenue driver has been uneven Apple services revenue growth: +8%, +5%, +6%, +5% - Still growing, but not at earlier pace I-bond net sales since May: $40 million - Sharp decline after yield reset I-bond purchases in January: $4 billion - Highlights the collapse in demand as yields fell Toyota Sequoia price: about $80,000 - Example of vehicle-price inflation and consumer tolerance Monthly car payment burden: over $1,000 per month for more than 25% in Texas and Wyoming - Shows expensive vehicle financing is widespread in some states

Pivotal Quotes: "there's going to be losses along the way" — Michael Batnick: Explaining that even a strong bull market can include significant corrections "valuations are worthless? 97% of the time for the majority of investors" — Michael Batnick: Arguing that valuation metrics are only useful at extremes for most investors "we talked ourselves out of a boom more than we talked ourselves out of a recession" — Michael Batnick: Offering an alternative explanation for why a recession never arrived

Implications: Investors should expect volatility, use valuations cautiously, and avoid simplistic recession narratives. Consumers and policymakers should read debt, housing, and labor data in context rather than from headlines alone.