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Truly the Horsemen of the Apocalypse incoming all points when TA starts to go off-piste 😉 Jamie Dimon with his cockroaches, BoE jittering about GFC mk 2. You have nothing to fear but fear itself etc…
You may well have considered and dismissed the VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF (TDGB), but it has a much lower US exposure than GBDV and has amassed an impressive £3bn AUM.
Performance has been strong in recent years.
Impressive analysis and a lot of good work
As an aged “pearl clutcher “ however right from the beginning of my retirement and with an asset allocation of 30/70 currently 35/65 – (3 global index trackers only) -I will be sitting this one out -yet again
Don’t ever want to miss out on US equity exceptionalism but with a bond heavy portfolio I am having no sleepless nights -yet!
xxd09
I haven’t got it to hand but John Authers from Bloomberg has been commenting on this subject recently (as have many I know).
He highlights the same point re CAPE but interestingly he also assessed the S&P 500 against gold over a similar period to you TA.
His point was that measuring CAPE in gold to a certain extent reflects the real decrease in the worth of fiat currencies and asks is CAPE really as high as your chart and similar show?
He isn’t sanguine about the risks but is putting forward an alternative viewpoint for consideration.
Personally I’m cutting back a bit on US exposure in general and the Magnificent Seven in particular.
I’ve moved about 4% of investable assets out of a global tracker and spread it across EM, UK and Europe in roughly equal weights.
Also considering an ex-US tracker and / or an equal weight US tracker to minimise Mag 7 exposure for another 4 or 5%.
Being in the early years if retirement with “enough” I’d rather be safe than sorry.
@Index – yes, I hold that and Dividend Aristocrats in my ISA, which is dedicated to providing a dividend income, since the top 10 holdings shows just one overlap (Verizon). Dividend Aristocrats though seems to be more a mid-Cap fund than a large (mega!) Cap?
I’m now retired and my SIPP equity exposure is about 40%. That should keep up with inflation long term. I hold a mentally bucketed non-equity portion to get me through to pension age – Royal London MM, some soon-to-mature nominal Gilts, some later-maturing linkers and some Gold – when I should have a reasonable floor. The rest is my upside risk portfolio and consists of Equity (HSBC FTSE All World), a bit more Royal London and Gold and some BHMG & Pershing cos, well, they might hit some home runs if SHTF (and in the meantime produce equity-like returns?) The risk portfolio I’ll use to top up the floor and I’ll manage using using Longinvest’s VPW method.
A superbly written and engaging piece @TA.
Love the image of the Nepalese sherpa climbing Mount CAPE.
And, yes, we should all also worry about the AI scam panda! 😉
Seriously though, the valuation/bubble trouble issue squats rent free in my mind.
From Yardeni:
28-12-2012 to 30-09-2025: S&P 493 did 10% p.a. total nominal return, but the Mag. 7 bashed out (check notes and starts hyperventilating) *27% p.a.* (for 13 years FFS!)
Mag. 7 on 03-10-2025: 12.1% of S&P 500 revenue, 23.1% of profits/earnings but 31.8% of market cap.
But:
Mag .7 forward profit margins (also on 03-10-2025) 26.8%, whilst the S&P 493 just 12.2%
With S&P 500/NASDAQ making up ~72% of ‘global’ (developed markets) large cap trackers (WINO ETFs, World In Name Only, as @ermine astutely and accurately calls it out), something like VWRD ETF is, effectively, now a bet on the US, especially the Mag. 7.
If you’re going to take a position, then IMHO take it deliberately, and not by accident.
There’s absolutely nothing wrong with either having or not having an opinion about, and a position on, markets.
But please don’t end up in a position that you didn’t mean to take!
The only other point is to agree emphatically with @TA’s comment about correlation within asset clases, i.e. within equities.
Whilst some equities (SCV, Low Volatility and Consumer Staples in particular) do often deliver positive returns over the full course of a crash, in the worse phase correlation does tend towards 1, and everything gets hammered to one degree or another.
Random example from within the Dotcom crash/early recovery for illustration: from August 2000 (several months after the crash began) to December 2004 (a couple of years off of the bottom of the crash) US value up 32% over whole period, S&P 500 down 13%, US growth down 39% and NASDAQ down 56%.
But at the nadir at the end of 2002 the NASDAQ was down 78% and even US value had fallen 30% compared to the peak of the Dotcom bubble in March 2000.
In that sense there was both somewhere to hide within US equity style sectors over the whole of the crash, but, equally, there was nowhere to hide at the very worst of the crash.
Everything US equity got blitzed just some some sectors/indices within US equities much more than others.
@Alan #4
> measuring CAPE in gold to a certain extent reflects the real decrease in the worth of fiat currencies and asks is CAPE really as high as your chart and similar show?
I can see the logic of measurug the S&P index in terms of gold to track out the depreciating dollar, but the CAPE in terms of gold should be the same as the CAPE in Dollars. The earnings in gold will be deflated by the debased $ but the price of the SPX will be deflated by the same amount?
@DH – Cheers! The numbers isolating the Mag 7 from the S&P 493 are staggering. Tallies with other analyses I’ve been reading that suggest US productivity would look like Europe if it wasn’t for the tech sector.
I think you’re right to emphasise that equity markets aren’t the place to be if you want to buck a crash.
@Alan – I’ll look up that Authers’ piece, cheers. I agree with you that there are plenty of credible reasons to believe that a CAPE of 40 today isn’t as high as a CAPE of 40 would have been in the past. But it’s still probably quite high. Even still, a high CAPE ratio doesn’t predict a crash. Just an increased likelihood of lower returns.
Just rereading your comment and DH’s – taken together your two comments really clarify that cutting back means betting against AI. That is a strong position to take. Could easily backfire. It reinforces the importance of avoiding all or nothing decisions.
Re: CAPE in Gold: @Alan #4, @ermine #7, @TA #8: In 1915, the Dow cost 2.65 ounces of gold. Since then, the Dow/Gold ratio has swung around in a long rhythm of boom and mean reversion. The ratio peaked at 18 in 1929, then plunged to 1.92 by 1933, the 1st full ‘boom to bust’ cycle. The next ran from 1933 to 1980, rising to 28 ounces in 1966, before collapsing to just 1.29 in 1980. The 3rd began in 1982, climbing to a record 42 ounces by 2000. Today it sits around 11ish, down from 15 just months ago, around Trump’s ‘liberation day’ nonsense in April, roughly back where it stood in September 1929.
Think about that for a second. From that 1st peak to now, measured by Dow/Gold, investors have gained only dividends, as the capital value of America’s leading companies, measured in what some consider ‘real money’, essentially went nowhere over nearly a century.
The top 10 US stocks are now worth about 40% of the S&P 500. Hard to imagine they could get bigger, but in 1881, railroads made up 63% of the US market. Maybe today’s AI giants are just the new railroads?
Nvidia and Microsoft now make up 20% of the S&P 100, the highest concentration in US history.
Across the wider S&P 500, they’re 15.4%, more than AT&T and IBM in the 80s (11%), Microsoft and GE in 2000 (9.1%), or Exxon and Walmart in 2009 (7.7%). Nvidia alone is 8.2%, around 3x the entire US energy sector, which, fittingly, powers its data centres!
Shiller’s CAPE recently hitting near the 44.19 December 1999 all time high is obviously bad news. Whilst the lows of 1932 (6.39) and 1982 (7.19) were great buying points, they could only be such for those who stayed solvent through the fall.
So a slightly mad thought experiment with a Dow/Gold system of buying stocks (and selling gold) when the Dow/Gold ratio falls below 5, and of buying gold (and selling stocks) when it rises over 15.
If you’d invested $100 in the Dow starting on January 1st 1913, then by April 2025 you’d have either $51,338 from capital appreciation alone or $4,897,400 with all dividends reinvested.
But, if you’d instead followed an (admittedly more than a tad barmy, and it only looks good with hindsight) Dow/Gold approach, with only five trades in the last century, not including the initial investment, then you’d have $56 million 😉
It strikes me that we are in the middle of Donald Rumsfeld’s uncertainty arena, the known unknowns. I must admit I was more worried a year ago with Rachel Reeves known known of the extension of IHT on DC pensions from April 2027. Couple this with the other Donalds plans to force NATO to spend more, whilst at the same time demoting the reserve currency status of the USD and taxing access to the US market, so I thought it would be risk adverse to sell the S&P and buy a defence etf, some gold and RLMM. What I thought was de-risking and keeping what I had below the IHT threshold hasn’t quite turned out as I hoped!
The more and more I read financial blogs like Monevator which deeply analyses the current financial situation so well and educates me in many areas of investing I never understood-the more and more I realise how little I know
Investing is obviously not a gamble for some but for most amateur investors the stockmarket is very much a known unknown
Re investing-I end up again and again just buying the whole stockmarket in bonds and equities with a single tracker fund -certainly very boring
My personal active financial input then is limited to areas under my direct control ie saving as much as I can ,living frugally and watching costs-not very exciting but with the merit of (a) probably working for me as an overall investment plan and (b) certainly being within my meagre investing capabilities -in finally achieving financial success
xxd09
@Bassavoce – Ha! So basically you trashed the S&P 🙂
@xxdo9 – your comment reminds me of Charley Ellis’ metaphor that investing is like amateur tennis. You win by not losing. Don’t try to smash it. Don’t go for glorious winners. Play the percentages and keep yourself in the game.
His book”Winning the Losers Game” was a seminal work for me
xxd09
@TA a very helpful article, thank you.
Conclusion; don’t know! ( unknowable , if it was knowable then it would arbitrage away immediately)
Policy; resilient portfolio to sit out if/when something happens.
I am always rather sceptical of new ETFs offering a ‘solution’
Going back to IUKD almost 20 years ago offering an index of UK dividend payers, seemed a great idea, the price is still below launch. ( it fell from £10 plus to below £5 during the 2007-2009 shake out …)
Hence the arrival of World ex US is a contrarian signal to me.
@Hariseldon: everything hinges on whether this is now a post-mean reversion world, or if what has held true before will continue to do so into the future.
If there’s been a fundamental macro structural shift due to ongoing and accelerating levels of price insensitive passive inflows into the most heavily passive index tracked markets (SPY/QQQ), then the game may have changed.
This is Mike Green’s argument, namely that new passive flows into a market act a bit like a mindless robot, automatically buying up shares regardless of how high the prices are.
He and many others argue that when passive share and net passive inflow is low (and active high) this doesn’t matter but when the reverse is the case (as it is increasingly) then it does.
In those circumstances the popularity of ex-US products would be a contrarian signal because it still wouldn’t be enough to overcome net passive inflow into the more heavily indexed SPY/QQQ.
But, if Green and co. are right, then as passive flows favour increasing weighting of the largest companies in the most heavily indexed markets the reductio ad absurdum of his argument would be to just hold whichever is the largest company in the S&P 500 (changing the holding as and when the identity of the largest constituent company changes).
That would be one heck of a bold call to make, although it’s not without some supporting reasoning, and I do note here that even holding just a small handful of companies can eliminate a surprisingly large proportion of the excess risk (measured by additional volatility) of holding just one company as compared to holding every single company in the whole index: i.e. (in terms of quantifying the risk elimination of single stock vs. market benchmark):
2 stocks = a 42% reduction (captures basic pairing benefits)
3 stocks = a 58% reduction
4 stocks = a 67% reduction
5 stocks = a 73% reduction
(Evans/Archer 1968, Statman 1987, Vanguard 2023)
I can certainly put my hand up and say that this last few months are making me uneasy. Markets continue marching upwards despite constant uncertainty. Seems to be underpinned by the hype around AI, data centres etc. I’m already, I think, overly cautious with my SIPP. At 37 I am 30% bonds (VGOV) and 70% equities (58% SSAC, 12% AVSG) and now my pot is pushing £400k, I am very nervous indeed and don’t know what to do about it!
We are in year 2 of our 5 year capital reduction plan, intending to give away half of our investments to relatives and charities to mitigate IHT. Having given away 10% in December we are about where we started due to the rise in share prices this year. I have been wondering for a while whether we should move some of the equities in our SIPPs to short dated gilts to protect more of the assets over the next 4 years. It would have to be our SIPPs because the ETFs we hold outside SIPPs and ISAs are very loaded with capital gains. The plan is to give all of the unsheltered ETFs to charity over the next 4 years. The gifts to charity will not trigger CGT, unless the budget changes that.
I don’t like moving away from market weight, but the S&P 500 CAPE, AI investment boom, Trump unpredictability, etc. has started to concern even me, so maybe selling US ETFs in our SIPP, reducing overall US exposure, just might be prudent at the present time.
The Early Retirement Now site and others have reasonable arguments to suggest that a US CAPE of 40 now corresponds to about 35 during the internet bubble, which peaked at around 45. So still some way short of that peak, but crashes can also happen on much lower CAPEs. Going into the GFC, US CAPE was below 27, so CAPE is not a great indicator of trouble ahead. The best that can be said is that low CAPEs have in the past, on average, been followed by high returns and high CAPEs on average by lower returns. Not a great predictor, but not completely useless.
I still remember the Japanese bubble and bust. We are well short of that (peak CAPE about 100 I believe), but it shows how hit and miss CAPE can be as an indicator of future returns.
I am due a sizable redundancy package in January. I am currently hoping the predicted crash happens conveniently such that my package hits the market bottom.
I got lucky with a bonus hitting my pension at the bottom of the COVID dip. Is it too much to hope that I will be lucky twice?
@Delta Hedge
Even without the passive inflows of today , there would have been a wall of dumb money in the past too, chasing the latest thing, eg nifty fifty.
plus ça change, plus c’est la même chose…
@naeclue – that is incredible. How’s it working out for you being a philanthropist? I can imagine it must generate pretty good vibes?
Good timing for a great article. By coincidence, I made my move the day before. I’m essentially a passive, market cap investor, with a modest UK home bias. But I decided to add a rule that no single country should represent more than 50% of my equity allocation (55% with a +/- 5% rebalancing band). So I trimmed the US down from ~62% to ~50% and spread the rest around the world based on market cap. That’s not going to make a HUGE difference either way, but it’s helping me sleep at night.
I didn’t change my 80/20 equities/bonds+cash split, I’m certainly not confident enough to try to time the top and the bottom. But simply having a little less concentration in the US mega caps feels prudent, still leaves Nvidia at more than 3% of my total portfolio, Microsoft around 2.7%, etc. – not going to completely miss out if they go to the moon, just have a little less exposure in case AI crashes or slowly deflates, or in case of any US-specific political-economic challenges.
@Hariseldon – yes I know what you mean. MSCI World ex US ETFs have obvs been introduced to meet a market need. But the demand is being driven by a genuine worry – high US market valuations and overwhelming dominance of the so-called World tracker.
If it’s a contrarian signal then it’s a contrarian-contrarian signal. That is, DH keeps telling us the “dumb” money is pouring into the S&P 500 regardless. Whereas the “moderately informed” money is saying, “Hang on, are these sky high prices really worth paying?” It is a fascinating dilemma. If the current moment really is a bubble than our successors will read about it in the future and believe it was all so obvious at the time. Of course, it’s anything but.
@cm258 – Just as a counterpoint, it doesn’t seem obvious to me that you’re conservatively invested. If you take a standard heuristic like “110 minus your age” = bonds then you’re about right.
What that heuristic misses is that risk tolerance isn’t solely a function of your age. The amount I had to protect had/has a huge influence on me. IIRC I was 80/20 until late 2018. But my assets were accumulating quickly due to my savings rate and the bull market.
Without realising it, I was transitioning through some binary psychological state. Previously I’d considered myself to be someone without much capital at stake i.e. a massive crash wouldn’t hurt me much in the big scheme of things.
At some point in 2018 a switch flipped in my mind. Now my portfolio was a large enough fraction of my target that a crash would have been emotionally devastating. But my rational brain was slow to catch up with my underlying feelings.
I remember TI nudging me to trim my equities. On the train home, I replayed the conversation and thought, “Nah, I’m fine, I want to power on. I can handle it.”
The World index dropped 11% in the last few months of 2018. I hated it! That told me my equity level was too high (TI was right, goddamit!) and I scaled back after that.
@Tubaleiter – I think that’s right.
Consider what will allow you to sleep at night.
Come up with a rules-based mechanism that enables you to implement the required change rationally.
Make the move.
I’ve been All world 100/0 up to this point and have 7 figures in my GIA, a mid 6 in my sipp and mid 6 in my ISA. I’m now hoping to FIRE in 5 years and now feel I need some diversification.
My current thinking is I should tilt away from the US down to 50% and introduce some “bonds” (20-30%). I have a chunk of shares in my GIA that have I could sell without too much CGT (lump sum that got Trumped).
I am thinking I will let my SIPP ride as I am still a long way from access.
My options are either:
1. Buy Bond / Gilt ETF in GIA and accept high rate tax on them
2. Buy Bond / Gilt in ISA and accept my ISA will just be bonds, accept my GIA will have all my future CG and have a harder time tilting my holding away from the US with crystallising substantial CG in my GIS
3. Build an intermediate gilt ladder in my GIA (not CGT) and leave my ISA alone.
I only see people talking about gilt ladders that they hold to term for income where as I want something that has a negative correlation with the stock market which I think means buying 8-10 year average duration gilts and potentially selling them early (to capture their market price, instead of letting them “pull to par”).
Is 3 the best option or is it a crazy idea? Do people DIY build an intermediate Gilt ladder for equity downside protection? What are the cons? How many “rungs” do I need considering? Does this approach lack diversification? What are the risks?
Thank you TA.
@J Buy individual gilts selling below par in your taxed account , the majority of your ‘income’ from the bonds is tax free capital gains and your effective tax rate is very low.
(Bonds are interesting, not particularly relevant at the moment but the shape of the yield curve can play a big part with how your gilt ladder matures. )
I would think of your gilts as the not failing ‘pot’ gilts provide absolute certainty if held to maturity.
Inflation is a factor that can undermine that certainty but there is inflation linked gilts for that…
The whole nature of the problem is uncertainty and the unknown unknowns….
The Accumulators comment at #22 regarding his experience of equity/bond allocation in 2018 is probably the most important and insightful aspect of this excellent article and comments, it’s the crux of the issue.
It’s the eternal see-saw of greed and fear, best to sit in the middle of that see-saw, at the fulcrum for a smooth ride !!
@J – I wrote a piece on using below par gilts to reduce your tax bill here: https://monevator.com/reduce-tax-on-savings-with-gilts/
I should think the comments are worth a look too. There are quite a few Monevator readers doing exactly what you propose.
TI has mentioned an accomplice of his who bought a very long gilt (matures in 2061) as a hedge against stock market reversal. It’s massively exposed to inflation but if interest rates fall then I expect it’ll do rather well: https://monevator.com/the-mysterious-case-of-treasury-2061/
@Hariseldon – “It’s the eternal see-saw of greed and fear” Love it! 🙂
Greed, until last week I was 76/24 global equity/bonds, inc 65% US.
However, the ever increasing market, Trumps unpredictability, cautionary warnings from the global financial elite, persuaded me that perhaps I ought to “dial down” a bit, esp. as an “Octo.”
Fear, so Iv’e rebalanced to glb 50/50 equity and bonds, inc 26% US, but since I had to sell first, instead of switching. I’m not timing, but now sitting on the sidelines ever ready to jump in, and from here it looks like Niagara.
@Hariseldon @TA #22: “wall of dumb money” and “DH keeps telling us the “dumb” money is pouring into the S&P 500 regardless”: I don’t think of it as dumb money.
Passive made overwhelming sense (at least as the core holding) at say <20% market share (by inflows and cap weight).
Now at over 50% (for S&P 500), not so much.
It's not the insensitivity to price that worries me.
It's that this is taking place at a point in time where active share relative to passive (the ratio being measured again in composite flow/cap weight terms) is poised in the next five to ten years or so to collapse, with concentration off the scale, and evidence of effective liquidity drying up.
Going from 20/80 passive/active – say around a decade ago (I haven't checked though when it was last 20/80) – to, say, a ceiling (given S curve adoption) of 80/20 (which at current trends of passive taking 3% p.a. share will be reached ~2035) moves the ratio between the 2 scenarios by a factor of 16x.
This causes passive fund flows to have an increasingly powerful relative effect per unit of flow.
Moreover, passive ETFs typically use optimised sampling to minimise costs which results in a self reinforcing % of flow going to the largest cap weights in the index, increasing their cap weight further, just as has happened, in a flywheel effect.
Similarly, in terms of non self correcting self reinforcement; with the tiny spreads market makers offer on the very largest stocks in the S&P 500 relative to the smallest cap weight shares on small cap indices (a few basis point spread for the former compared to hundreds of basis points for the latter) market makers inevitably hold a far small percentage of the outstanding free float of shares in the largest cap weight shares in the S&P 500 compared to the smallest cap shares in the smallest indices.
This then inevitably results in their being far less actual (IRL) liquidity *relative to cap weight* for the very biggest companies compared to the smallest. Again, it’s relative liquidity that matters here, not the absolute value of shares held by market makers.
In turn, that then means that passive flows (indeed all flows) into the largest constituent weights of the S&P 50 have a much larger effect than one would otherwise expect – and this will increase with increasing passive share relative to active.
A useful perspective is given on this here today:
https://open.substack.com/pub/dualedgeinvest/p/the-passive-bubble
@DH A lot of interesting comments (also in the link), but I always struggle to understand how passive investing is supposed to materially drive the current US stock market concentration.
Presumably, it wasn’t the passive S&P500 investor that drove TSLA to a PE of 300x. This likely seems to be down to active investment decisions – even if partially implemented through passive vehicles like tech ETFs. Similarly, a lot of other issues mentioned would be true for both active and passive investments. For example, if market makers hold less liquidity for large caps, presumably this is not materially different whether the capital comes from active or passive investment? Or is the issue that small caps are relatively less traded than they used to be? But even so, this would not explain the concentration into half a dozen stocks, and active investors would still be likely to be caught up in any liquidity crunches whether they caused it or not.
Personally I have been underweight in US equities for a long time, and never been entirely comfortable with the huge geographic concentration implied by world trackers – even if a lot of the companies operate globally anyway. I don’t benchmark my portfolio against indices, so there is no tracking regret. (But I still use passive vehicles to invest.)
If return expectations were not a priori higher for the US, then why take concentration risk. And if they were higher, it seems that the current US government is trying to do everything in its power to eliminate any possible reasons I can think of that might justify higher return expectations.
Plenty of much cheaper alternatives out there to US equities, as set out in this informative summary today of bubble concerns (with special emphasis on the chart reproduced therein from Topdown Charts of PE10/CAPE values for US, ex-US DM, EM and Frontier Markets):
https://open.substack.com/pub/macromornings/p/bubble-is-enormous
And with a h/t to the Global Guru Substack for these stats (also today) showing the start of a rotation: with MSCI All Country World Index ex-USA up (a more than solid) 26% year to date, compared with the S&P 500’s mere 15%, with the Korean Kopsi up a whopping 64%, the Nikkei up 24%, the DAX 22%, and with even our trusty laggard Footsie managing a very respectable 18%.
And, as the Topdown Charts chart illustrates, ex-US DM is not expensive, and EM is outright somewhat cheap on a fundamental (earnings multiple) basis; as well as being hugely cheap on a relative basis compared to US valuations.
Sorry @White Sheep #29, I’d missed your comment when posting yesterday. My apologies.
On TSLA, it’s Sir Issac Newton’s quote on the South Sea Bubble that he could calculate the motions of the heavenly bodies, but not the madness of the people. Never has a company underdelivered so greatly after promising so much, and never has a market been so forgiving. Having said that, PLTR is giving TSLA a run for their money in the hype stakes on TTM PE of over 600x now and a trailing EV/EBITDA of over 700x.
On the active v passive flow effect into the largest large caps with the thinest market maker inventory relative to market capitalisation:
– I think the issue is passive flow has to go to the largest cap firms in proportion to their cap weight whereas active flow doesn’t and on value grounds tends to go elsewhere (unless the active flow is really a closet tracker).
– Because the active flow tends to go to smaller firms, those firms, relative to their cap weight, have a larger market maker inventory of their shares (obviously the inventory is much smaller in absolute terms as compared to the value of market maker inventory for the largest companies’ shares, but it’s still much smaller as compared to ratio of the market cap of the largest companies compared to the smallest).
– As the market makers are incentivised to hold relatively more (compared to cap weight) small cap and relatively less (compared to cap weight) mega cap (as the spread difference between the spreads on mega caps and micro caps can be 100x +, i.e. a few bps versus hundreds of bps), the active flows, in aggregate, into smaller caps have less effect on pricing than the passive flows into, in aggregate, mega caps.
– This has a forcing effect on the price of the mega caps which is bigger than you would expect if the net fund inflows from active and passive investors were equipotential in their effects.