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This may be my "this time it's different" rationalization, but I can see an argument for valuations staying larger in the future. Real interest rates have been
by CompelTechnic 8y ago
This may be my "this time it's different" rationalization, but I can see an argument for valuations staying larger in the future.
Real interest rates have been decreasing in the long run over hundreds of years. This reflects the institutions of society becoming more permanent and less risky. In a world of low interest rates, P/E multiples naturally become high. Over the last couple of decades in particular, the financial world has become globally intertwined, and it has become increasingly unlikely for any event to truly upset the status quo. Institutions are more fixed than ever, so valuations should be as well.
If the high valuations remain high, then a lot of financial wisdom developed in the last 100 years will have to be rethought. Saving for retirement is a different calculation when your returns are dominated by P/E expansion rather than dividends and earnings growth.
- Retric 8y agoIt's hard to say how much is reduction in risk vs increase in capital vs bubbles deflating. The stock market has seen a massive influx of capital from 401k's, but this is mostly new money without nearly as many people with 401k's in retirement. Over the next 30 years that balance shifts. As people will be taking more money out of the stock market due to cashing in 401k's than they put into the stock market which will have significant impact.
- gok 8y ago401k’s are only about $5 trillion total. Even if half of them were in US stocks (it’s less than that), that would be less than 10% of the stock market.
- ummonk 8y agoThat's enough to drive up the stock market by a lot (trillions of dollars of new money drive up market prices for stocks, and the value of exsiting investments, most of which are never sold to the 401ks by existing investers, goes up a lot).