When You Look Back On This Moment In History14 Jun 2015
A great read from John Hussman this weekend, as always! What will you think when you look back on this moment in history? A few select quotes below:
Among the measures best correlated with actual subsequent S&P 500 total returns, capitalization-weighted market indices such as the S&P 500 were more richly valued in only 54 weeks of history, 21 of which represented the final advance to the 2000 market peak, with the remaining 33 representing the retreat from that high to present valuation levels, on the way to a 50% loss in the S&P 500 Index and an 83% loss in the Nasdaq 100 Index.
When you look back on this moment in history, remember that the valuation of the median stock was never higher. Ever. Even at the 2000 peak.
Forget, for a moment, about the next 5 years, 10 years, or even 15 years. Suppose that the market was to experience a secular low no sooner than 20 years from today. What would the total return of the S&P 500 be in the interim? Well, we know that earnings, revenues, and nominal GDP have historically proceeded at a peak-to-peak growth rate of 6% annually across economic cycles. That growth rate has been gradually slowing in recent decades, and there are strong reasons beyond inflation – rooted in labor force growth and real productivity growth – to be more conservative. But suppose, as optimists, we assume the same 6% nominal growth rate in the future. In that case, the percentage change in the S&P 500 over the 20 year period to that secular low would be (1.06)*(¼)^(1/20)-1 = a loss of -1.1% annually. Fortunately, one would expect dividend yields to contribute enough to bring the total return of the S&P 500 just above zero.
When you look back on this moment in history, remember that S&P 500 returns had never materially exceeded zero over the decade following similar valuations.
Risk preferences aren’t measured by what the Fed does, but by what investors do.