0% NOMINAL ANNUAL RETURNS OVER THE NEXT 8 YEARS

Nominal means before inflation. With true inflation running at 5% or higher, stocks are priced to deliver negative 5% real annual returns over the next 8 years. Math is hard. Believing and hoping is easy. John Hussman provides the uncomfortable facts:

At present, we observe clearly negative investment prospects for the equity market. Moreover, bullish advisory sentiment (Investors Intelligence) has now surged past 60%, compared with only 15% bears, while risk premiums have declined to record lows on junk debt, corporate debt, and equities (equally-weighted) – and to near-record lows on capitalization-weighted equity indices. While trend-based measures are generally positive here, providing some speculative basis for purely trend-following strategies, the fact is that these strategies have typically not fared well, on average, in similarly overvalued, overbought, overbullish conditions, even when interest rates have been quite low. The persistence of these overextended conditions in the present speculative episode has undoubtedly been a source of frustration for us – and we’ve adapted by being less aggressive in our response. Still, we would have to contravene a century of historic evidence, as well as valuation methods that have not missed a beat even in recent decades, in order to embrace equity market risk in present conditions.

Last week’s comment, Ockham’s Razor and the Market Cycle reviews the arithmetic relating to present stock market valuations, and what it means for investors. A century of evidence provides every reason to expect zero total returns on the S&P 500 at horizons of 8 years or less, and only about 1.8% annually over the coming decade. The implications are worse for measures that take the position of profit margins into consideration (which the most historically reliable measures do). I should emphasize that while these measures provided accurate warning at the 2000 and 2007 peaks, they were also quite positive at the 2009 lows, projecting 10-year S&P 500 total returns in the 12-14% annual range, depending on which measure one used (see also our late-October 2008 comment, Why Warren Buffett is Right and Why Nobody Cares).

Read Hussman’s Weekly Letter Here.

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card802
card802

I should do what my son did, buy an asset and give the market the finger.

38′ Lagoon, anchored in Cape May NJ presently, south of Wildwood. Someone I’ve read has property there I think.
Sailing it back to Michigan from Maryland, should take him til September.

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