Market Climate
As of last week, the Market Climate for stocks remained characterized by an unusually hostile set of overvalued, overbought, overbullish, rising-yield conditions. The record of steeply negative market outcomes that have followed these conditions has nothing to do with myopinion but instead reflects objective historical evidence. The outcome in this particularinstance may be different, and we have no problem with investors who are willing to invest on that expectation. We are not. It's that simple.
At present, we estimate the likely total return for the S&P 500 over the coming decade to be about 4.1% annually (nominal). While this may seem adequate compared to a 10-year Treasury yield of 2.3%, the comparison entirely ignores risk. You don't just "lock in" a 10-year return - you ride it out. The volatility of stocks is dramatically higher than the volatility of a 10-year bond. So the proper question is not whether stocks are priced to achieve a greater 10-year return than bonds, but what happens if investors eventually demand even modestlyhigher prospective returns. The answer is that the impact of changes in valuation multiples would swamp any reasonable expectation for growth in fundamentals. Satisfactory returns on stocks now require strong assumptions for GDP growth (about 6% nominal annual growth) and sustained profit margins (presently about 50% above the historical norm), in addition to the requirement that valuations remain rich and prospective returns stay indefinitely depressed. This may occur over the short run, but beyond that it strikes us as pure speculation.
http://www.hussman.net/wmc/wmc120319.htm
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