I think there is a point to excess CAPE yield, but do not emphasize it. Why? Most importantly, because in my view the markets are not driven by such spreads. There are many sources of demand for each of stocks and bonds, and they only partly overlap. So one investor might make a decision based on the spread, but another is focused on where they think some stock is going or on their view of forward interest rate changes.
I find that comparing the SPY with the equal weighted RSP is helpful to judge the distortion from the big gainers.
Many or even most people do not have the temperament to invest successfully, even in index funds. They need financial advisors. But today I think a collection of quality dividend payers with high credit ratings is very likely to do much better than the S&P 500 over the next decade or two. One will not need to pick in detail to manage that much, IMO.
I think you are right, and it is very helpful to look at some of these lost decades.
I guess another approach for index funds is to hold more than just an SP500 index. I have seen studies showing how you do better if you hold a mix of large, small, and mid cap ETFs. Also, I wonder how your comparison would look if you considered a couple of hard asset sector ETFs (energy, REITs, etc.) to the SP500 over that decade.
Agree that diversifying index funds, and also including international, can improve results. Unfortunately the index ETFs in REITs or energy don't have long histories. And both sectors evolved a lot too.
Another great article Paul. I came to the same conclusion some time ago on index funds. I believe I read that the cause of the Challenger disaster was that the weather was too cold that morning making the O-Rings less pliable. But then as sometimes happens bureaucratic expediency overruled science.
I would say the Challenger disaster was much worse than that. Yes, the immediate cause was cold O-rings on the day of the launch. But those O-rings were a problem from the start and by the time of the accident there were engineers at Morton-Thiokol who knew what would happen and tried to stop the launch, only to be overruled by their (evil?) managers. And that was only the last of a long string of dangerous decision that also included management at NASA. So I would say that the fundamental cause was managers who valued public relations above reality.
The famous quote from Richard Feynman in the Rogers Commission report captures the essence: “For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.”
Wow! This stellar article is highly beneficial, Paul. Thank you. Others tout the index funds, but you've convinced me not to invest in that direction. It's one less thing not to have to consider doing or devoting time to figuring out, and that's worth a fortune right there to this 72-year-old retiree and spouse! The seasons are passing, after all, as your beautiful photos always attest.
I'm really looking forward to your deep dive on midstream. My working assumption is that "drill baby drill" will not produce the production increase Trump hopes for, but it will hold oil prices down (world events could change that in a heart beat of course). But that also means increased production, be it small or large, and the pipeline companies ought to wind up running at capacity = more dividends.
Appreciate your views on S&P index funds, they align with my own. But not all index funds are built equally. I own SMH, which is a collection of semi-conductor companies. 10 year total return of SMH is 1,120% versus the SP500's 195% (source Seeking Alpha). To my surprised (and concern) the 10 year total return of AMLP, a basket of midstreams that issue K-1's, is only 47.91%. Ouch. SMH is my largest holding (yaaay!) and AMLP is my second largest (gulp). Plus PAGP is 4th. So I have a lot of midstream. I've been saying I'm energy heavy, but if I break midstream out of the number I'm really midstream heavy.
Challenger disaster - I've read various articles on what happened and it is truly stomach churning. Some of the Morton Thiokol engineers who got the initial blame toured engineering universities across Canada and the US to talk about what happened. Their message to the engineering students was pretty simple. Express your concerns bluntly, concisely, in emails and make CERTAIN you've retained copies of those emails. In the end, Morton Thiokol engineers knew the seals would fail at the temperatures that day, but by the time their messages went through many layers of management, they morphed into "its a nice day, launch".
Anyone who has worked for a large organization has seen this in action. I don't know who the author of the following is, but they nailed it:
In the beginning, there was a plan, and then came the assumptions,
And the assumptions were without form, and the plan without substance,
And the darkness was upon the face of the workers,
And they spoke among themselves saying,
“It is a crock of shit and it stinks.”
And the workers went unto their Supervisors and said,
“It is a pile of dung, and we cannot live with the smell.”
And the Supervisors went unto their Managers saying,
“It is a container of excrement, and it is very strong,
Such that none may abide by it.”
And the Managers went unto their Directors saying,
“It is a vessel of fertilizer, and none may abide by its strength.”
And the Directors spoke among themselves saying to one another,
“It contains that which aids plant growth, and it is very strong.”
And the Directors went to the Vice Presidents saying unto them,
“It promotes growth, and it is very powerful.”
And the Vice Presidents went to the President, saying unto him,
“This new plan will actively promote the growth and vigor
The thing about the pipelines is that they mostly are at capacity. But It takes a lot of confidence in future production by producers to sign the long-term agreements needed to enable construction of new pipelines.
As a non-US investor I believe a significant reason for the higher CAPE ratios is that US equity markets offer better governance, lower taxes and enhanced liquidity compared to almost any other country. Hence overseas investors are willing to pay a premium for US equities.
I always thought the US government could do a much better job of marketing the value of its equities markets worldwide.
You are welcome, Wally. I certainly agree that those things you mention could boost asset prices in the US relative to other countries. But I'm not sure there is much difference in that since WWII.
Passive index buying is price insensitive and can lead to overvaluation. Costco is a great company but is it really worth 50 times earnings? Their warehouses are so crowded and traffic reaching them has worsened so future growth will be lower.
The challenge for younger investors like me is that our workplace 401k plans have limited options, and half of the 32 options in my 401k plan are bond funds or target date funds that are just variations on the S&P 500 and bonds. Thankfully I rolled over all prior 401ks to a Roth IRA with more options.
REG retested the January low yesterday and I picked up some shares. NYC is 12% of rent so Mamdani's proposal to create government grocery stores could be driving the selloff along with the decline in TLT (30 year bond prices).
I wonder if investors who were burned by the REIT selloff during the GFC and Covid are worried about a repeat? As you point out, most public REITs have lower leverage now and have been able to roll part of their debt so the "maturity wall" of refinancing is less of a concern for them and instead a manageable headwind of future higher interest costs.
REITs held in taxable accounts benefit from Section 199a deductions even for investors who take the standard deduction. (I verified this on my 2024 tax return line 13 "Qualified business income deduction from Form 8995 or Form 8995-A" exactly matches the $830 amount that is the result of the 20% deduction of $4,151 in qualified REIT dividends my taxable account received last year.)
Energy stocks have rebounded strongly since the April lows whereas many REITs are back at the January lows and near the April lows. EPR appears to be trading more on AMC's rebound than on the general REIT sector.
Thanks, Erik. As always interesting thoughts from you. Seems to me there were plenty of investors who left the REIT sector permanently during those two periods. Not sure how many came back. In the short run, oil prices tell the tale for many energy stocks, and oil is up more than 10% from its lows. Agree that EPR has been marching to a different drummer all year.
One point of interest is that 49% of the S&P 500's gains over the last 10 years came from the top 10 companies in the index. https://grok.com/share/bGVnYWN5_69991027-d41e-4951-acc8-99ab0c8d2fca
Also, have you taken a look at the Excess CAPE Yield? Do you find it useful?
I think there is a point to excess CAPE yield, but do not emphasize it. Why? Most importantly, because in my view the markets are not driven by such spreads. There are many sources of demand for each of stocks and bonds, and they only partly overlap. So one investor might make a decision based on the spread, but another is focused on where they think some stock is going or on their view of forward interest rate changes.
I find that comparing the SPY with the equal weighted RSP is helpful to judge the distortion from the big gainers.
Of course, a focused portfolio only does better if you do the work and pick the right stocks. Something which has proven difficult for many people.
Many or even most people do not have the temperament to invest successfully, even in index funds. They need financial advisors. But today I think a collection of quality dividend payers with high credit ratings is very likely to do much better than the S&P 500 over the next decade or two. One will not need to pick in detail to manage that much, IMO.
I think you are right, and it is very helpful to look at some of these lost decades.
I guess another approach for index funds is to hold more than just an SP500 index. I have seen studies showing how you do better if you hold a mix of large, small, and mid cap ETFs. Also, I wonder how your comparison would look if you considered a couple of hard asset sector ETFs (energy, REITs, etc.) to the SP500 over that decade.
Agree that diversifying index funds, and also including international, can improve results. Unfortunately the index ETFs in REITs or energy don't have long histories. And both sectors evolved a lot too.
....and we are happy that the energy and REIT sectors have evolved. :-)
Another great article Paul. I came to the same conclusion some time ago on index funds. I believe I read that the cause of the Challenger disaster was that the weather was too cold that morning making the O-Rings less pliable. But then as sometimes happens bureaucratic expediency overruled science.
I would say the Challenger disaster was much worse than that. Yes, the immediate cause was cold O-rings on the day of the launch. But those O-rings were a problem from the start and by the time of the accident there were engineers at Morton-Thiokol who knew what would happen and tried to stop the launch, only to be overruled by their (evil?) managers. And that was only the last of a long string of dangerous decision that also included management at NASA. So I would say that the fundamental cause was managers who valued public relations above reality.
The famous quote from Richard Feynman in the Rogers Commission report captures the essence: “For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.”
Wow! This stellar article is highly beneficial, Paul. Thank you. Others tout the index funds, but you've convinced me not to invest in that direction. It's one less thing not to have to consider doing or devoting time to figuring out, and that's worth a fortune right there to this 72-year-old retiree and spouse! The seasons are passing, after all, as your beautiful photos always attest.
Thanks for the kind words, Dr. Keith.
Dear Paul, if you follow Tour de France I think on Monday 14th the Tour will visit the Puy De Dôme (the volcano above my city of Clermont-Ferrand).
Wow! My only challenge is finding time to watch!
I'm really looking forward to your deep dive on midstream. My working assumption is that "drill baby drill" will not produce the production increase Trump hopes for, but it will hold oil prices down (world events could change that in a heart beat of course). But that also means increased production, be it small or large, and the pipeline companies ought to wind up running at capacity = more dividends.
Appreciate your views on S&P index funds, they align with my own. But not all index funds are built equally. I own SMH, which is a collection of semi-conductor companies. 10 year total return of SMH is 1,120% versus the SP500's 195% (source Seeking Alpha). To my surprised (and concern) the 10 year total return of AMLP, a basket of midstreams that issue K-1's, is only 47.91%. Ouch. SMH is my largest holding (yaaay!) and AMLP is my second largest (gulp). Plus PAGP is 4th. So I have a lot of midstream. I've been saying I'm energy heavy, but if I break midstream out of the number I'm really midstream heavy.
Challenger disaster - I've read various articles on what happened and it is truly stomach churning. Some of the Morton Thiokol engineers who got the initial blame toured engineering universities across Canada and the US to talk about what happened. Their message to the engineering students was pretty simple. Express your concerns bluntly, concisely, in emails and make CERTAIN you've retained copies of those emails. In the end, Morton Thiokol engineers knew the seals would fail at the temperatures that day, but by the time their messages went through many layers of management, they morphed into "its a nice day, launch".
Anyone who has worked for a large organization has seen this in action. I don't know who the author of the following is, but they nailed it:
In the beginning, there was a plan, and then came the assumptions,
And the assumptions were without form, and the plan without substance,
And the darkness was upon the face of the workers,
And they spoke among themselves saying,
“It is a crock of shit and it stinks.”
And the workers went unto their Supervisors and said,
“It is a pile of dung, and we cannot live with the smell.”
And the Supervisors went unto their Managers saying,
“It is a container of excrement, and it is very strong,
Such that none may abide by it.”
And the Managers went unto their Directors saying,
“It is a vessel of fertilizer, and none may abide by its strength.”
And the Directors spoke among themselves saying to one another,
“It contains that which aids plant growth, and it is very strong.”
And the Directors went to the Vice Presidents saying unto them,
“It promotes growth, and it is very powerful.”
And the Vice Presidents went to the President, saying unto him,
“This new plan will actively promote the growth and vigor
Of the company with very powerful effects.”
And the President looked upon the Plan
And saw that it was good,
And the Plan became Policy.
And this, my friend, is how shit happens.
The thing about the pipelines is that they mostly are at capacity. But It takes a lot of confidence in future production by producers to sign the long-term agreements needed to enable construction of new pipelines.
Thanks for sharing that lyrical story.
Thank you for the great article Paul.
As a non-US investor I believe a significant reason for the higher CAPE ratios is that US equity markets offer better governance, lower taxes and enhanced liquidity compared to almost any other country. Hence overseas investors are willing to pay a premium for US equities.
I always thought the US government could do a much better job of marketing the value of its equities markets worldwide.
You are welcome, Wally. I certainly agree that those things you mention could boost asset prices in the US relative to other countries. But I'm not sure there is much difference in that since WWII.
Passive index buying is price insensitive and can lead to overvaluation. Costco is a great company but is it really worth 50 times earnings? Their warehouses are so crowded and traffic reaching them has worsened so future growth will be lower.
The challenge for younger investors like me is that our workplace 401k plans have limited options, and half of the 32 options in my 401k plan are bond funds or target date funds that are just variations on the S&P 500 and bonds. Thankfully I rolled over all prior 401ks to a Roth IRA with more options.
REG retested the January low yesterday and I picked up some shares. NYC is 12% of rent so Mamdani's proposal to create government grocery stores could be driving the selloff along with the decline in TLT (30 year bond prices).
I wonder if investors who were burned by the REIT selloff during the GFC and Covid are worried about a repeat? As you point out, most public REITs have lower leverage now and have been able to roll part of their debt so the "maturity wall" of refinancing is less of a concern for them and instead a manageable headwind of future higher interest costs.
While the recent tax bill will increase future deficits and provide a headwind for REITs, it did make the Section 199a deduction permanent: https://www.dlapiper.com/en/insights/publications/2025/07/one-big-beautiful-bill-act-reit
REITs held in taxable accounts benefit from Section 199a deductions even for investors who take the standard deduction. (I verified this on my 2024 tax return line 13 "Qualified business income deduction from Form 8995 or Form 8995-A" exactly matches the $830 amount that is the result of the 20% deduction of $4,151 in qualified REIT dividends my taxable account received last year.)
Energy stocks have rebounded strongly since the April lows whereas many REITs are back at the January lows and near the April lows. EPR appears to be trading more on AMC's rebound than on the general REIT sector.
Thanks, Erik. As always interesting thoughts from you. Seems to me there were plenty of investors who left the REIT sector permanently during those two periods. Not sure how many came back. In the short run, oil prices tell the tale for many energy stocks, and oil is up more than 10% from its lows. Agree that EPR has been marching to a different drummer all year.