America’s Lost Decade
Published on October 11, 2010
Published on October 11, 2010
The title may sound pretty pessimistic but that’s reality when measured in terms of US stock market returns of the past 10 years. To be clear I am not undermining technological and social advancements, but instead I am referring to only stock market performance. This may or may not be the same definition as of Japan’s lost decade too.
After the dot com bubble, the tech bubble, the housing bubble, and the leverage bubble before the current crisis, the returns from the stock markets are negative from the past 10 years. I don’t know if we are done with this The Great Recession yet as we are still going through The Great Debt Bubble (if I may say so) not just in the US but almost all around the world. If we are in this mess as the Great Private sector de-leveraging is taking place, I can only imagine what will happen when the govt de-leveraging will begin.
Over the past 10 years, Dow is flat, S&P is down almost 17%, Nasdaq about 28%; the positive side of the story is that it could have been worse if not for the trillions that has been spent to pause The Great Recession. That was past ten years. Where are we now? Pls see below from an excellent weekly commentary from John Hussman of Hussman funds. I shall encourage you to read the full article to appreciate the depth of analysis.
Two point six five
If you look through market history prior to the valuation bubble that began in the mid-1990’s, you will observe only three times that the dividend yield on the S&P 500 dropped to 2.65%. The precise dates should be instantly familiar. August 1929, December 1972, and August 1987. These dates represented the peaks prior to the three worst market plunges of the 20th century.
Prior to the mid-1990’s, the median dividend yield on the S&P 500 had been about 4.1%. Then, the market launched into what would ultimately become a valuation bubble, followed by a decade of dismal returns for investors. Since then, the dividend yield on the S&P 500 has regularly dipped below 2.65%, and as of last week, had dropped to just 2%.
It is not a theory, but simple algebra, that the total return on the S&P 500 over any period of time can be accurately written in terms of its original yield, its terminal yield, and the growth rate of dividends. Specifically,
Total annual return = (1+g)(Yoriginal/Yterminal)^(1/T) – 1 + (Yoriginal+Yterminal)/2
As it happens, the long-term growth rates of S&P 500 dividends, earnings (measured peak-to-peak across economic cycles) and other fundamentals have been remarkably stable for more than 70 years, at about 6% annually, with very little variation even during the inflationary 1970’s. Even if one includes the depressed yields of the bubble period, and restrict history to the post-war period, the median dividend yield is 3.7%. Thus, a reasonably good estimate of future 7-year total returns for the S&P 500 is simply:
Total annual return = (1.06)(Yoriginal/.037)^(1/7) – 1 + (Yoriginal + .037)/2
At a 2% dividend yield, this estimate is currently -0.07%.
While this is about long term valuations, I have already shared my thoughts about short term (Overbought, Overvalued, Over Bullish and Over Stretched). In my opinion next few weeks are important for a near term direction of the market. And personally, I wouldn’t be a buyer at this point regardless of whatever analysis is being presented by Wall Streen Analysts (Weren’t majority of them justifying valuations even before The Great recession was upon us).
There is another interesting article that I like, this is from the Bond King Bill Gross in his monthly outlook titled “Stan Druckenmiller is Leaving”. Here is the summary-
- The New Normal has a new set of rules. What once pumped asset prices and favored the production of paper, as opposed to things, is now in retrograde.
- The hard cold reality from Stan Druckenmiller’s “old normal” is that prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated.
- Investors are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns.
On Friday, Dow closed above 11k and it has made headlines in all the major media. This may entice more and more traders convincing the worst is over and I hope it is, but I can’t rely on my hope for trading. I am not a perma bear, but I do keep one thing in mind. “Markets takes staircases to go up but it uses gravity to fall”. At this juncture I am cautious and biased for a bearish direction, at least for next few weeks.
My personal views are the not the view that we trade OPNewsletter on. OPN is designed for income strategies and we like cash flow vs capital appreciation. Even for this month, we are up +6.0%. This week will kick-off earning season and I shall be sharing the speculative trades as bonus trades. So if you have been waiting on the sidelines, this maybe be even more appropriate time to join OPNewsletter to trade options vs equity. Options offers flexibility, trade’em.
Whatever are your views, at this juncture pls remain humble and flexible as “Markets can remain irrational longer than you can remain solvent”.
Trade carefully, trade profitably, OP
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