Industrial Insight

bad news for future returns… | March 19, 2013

March 18, 2013 Investment, Speculation, Valuation, and Tinker Bell

John P. Hussman, Ph.D.

So I’m not sure it’s even reasonable to assume 6.3% nominal GDP growth going forward, unless most of it is inflation (in which case the prospective nominal return may be the same, but the prospective real return would be lower). Still, the estimates of prospective 10-year S&P 500 returns below stick with a 6.3% long-term economic growth assumption, because I want to emphasize that prospective market returns are dismal even on optimistic economic assumptions.

Hussman’s Shorthand Estimates of S&P 500 Expected 10-Year Nominal Annual Total Returns

1) Forward Earnings Model – see Valuing the S&P 500 Using forward Operating Earnings:

(1+g)(12.7 / FOPE)^(1/10) – 1 + Dividend_yield*(FOPE / 12.7 + 1) / 2

g = 1.063 x (0.072 / (FOE/S&P 500 Revenues))^(1/10) – 1

FOE: forward operating earnings. FOPE is the forward operating P/E.
Underlying economic growth is modeled at 6.3% (all of the constants should be revisited over time)

2) Shorthand Shiller Model – see The Siren’s Song of the Unfinished Half Cycle:

1.063 * (15 / ShillerPE)^(1/10) – 1 + Dividend_yield (decimal)

3) Dividend Model – see Estimating the Long-Term Return on Stocks (1998):

1.063 * (Dividend_yield / .037)^(1/10) – 1 + (Dividend_yield + .037)/2

4) Shorthand Market Value / GDP Model – new! fun! because I care:

1.063 * (0.65 / (MV / GDP_Nominal))^(1/10) – 1 + Dividend_yield (decimal)

Market value of equities of nonfarm nonfinancial companies from Z.1 Flow of Funds data

The average correlation between these estimates and subsequent 10-year S&P 500 total returns is 84%. Presently, the average estimate of prospective S&P 500 nominal total returns is just 3.6% annually for the coming decade.



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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.







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