The Next Decade: Valuations & The Destiny Of Low Returns
Jani Ziedins via Cracked Market recently penned an interesting post:
“As for what comes next, is this bull market tired? Is a crash long overdue? Not if you look at history. Stocks rallied for nearly 20 years between the early 1980s and the late 1990s. By that measure, we could easily see another decade of strong gains before the next “Big One”. Of course, the worst day in stock market history happened during that 20-year bull market in 1987, so we cannot be complacent. But the prognosis for the next 10 years is still good even if we run into a few 20% corrections along the way.”
After a decade of strong, liquidity-driven, post-crisis returns in the financial markets, investors are hopeful the next decade will deliver the same, or better. As Bob Farrell once quipped:
“Bull markets are more fun than bear markets.”
However, from an investment standpoint, the real question is:
“Can the next decade deliver above average returns, or not?”
Lower Returns Ahead?
Brian Livingston, via MarketWatch, previously wrote an article on the subject of valuation measures and forward returns.
“Stephen Jones, a financial and economic analyst who works in New York City, tracks the formulas that several market wizards have disclosed. He recently updated his numbers through Dec. 31, 2018, and shared them with me. Buffett, Shiller, and the other boldface names had nothing to do with Jones’s calculations. He crunched the financial celebrities’ formulas himself, based on their public statements.”
“The graph above doesn’t show the S&P 500’s price levels. Instead, it reveals how well the projection methods estimated the market’s 10-year rate of return in the past. The round markers on the right are the forecasts for the 10 years that lie ahead of us. All of the numbers for the S&P 500 include dividends but exclude the consumer-price index’s inflationary effect on stock prices.”
- Shiller’s P/E10 predicts a +2.6% annualized real total return.
- Buffett’s MV/GDP says -2.0%.
- Tobin’s “q” ratio indicates -0.5%.
- Jones’s Composite says -4.1%.
(Jones uses Buffett’s formula but adjusts for demographic changes.)