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Posts Tagged ‘John Hussman’

David Tepper was on CNBC this morning arguing that stocks are historically cheap:

[Tepper] said the post showed “when the equity risk premium is high historically, you get better returns after that.” He continued, “So we’re at one of the highest all-time risk premiums in history.”

In making his argument Tepper referred to this article, Are Stocks Cheap? A Review of the Evidence, in which Fernando Duarte and Carlo Rosa argue that stocks are cheap because the “Fed model”—the equity risk premium measured as the difference between the forward operating earnings yield on the S&P500 and the 10-year Treasury bond yield—is at a historic high. Here’s the chart:

Here’s Duarte and Rosa in the article:

Let’s now take a look at the facts. The chart [above] shows the weighted average of the twenty-nine models for the one-month-ahead equity risk premium, with the weights selected so that this single measure explains as much of the variability across models as possible (for the geeks: it is the first principal component). The value of 5.4 percent for December 2012 is about as high as it’s ever been.The previous two peaks correspond to November 1974 and January 2009. Those were dicey times. By the end of 1974, we had just experienced the collapse of the Bretton Woods system and had a terrible case of stagflation. January 2009 is fresher in our memory. Following the collapse of Lehman Brothers and the upheaval in financial markets, the economy had just shed almost 600,000 jobs in one month and was in its deepest recession since the 1930s. It is difficult to argue that we’re living in rosy times, but we are surely in better shape now than then.

The Fed model seems like an intuitive measure of market valuation, but how predictive has it been historically? John Hussman examined it in his August 20, 2007 piece Long-Term Evidence on the Fed Model and Forward Operating P/E Ratios. Hussman writes:

The assumed one-to-one correspondence between forward earnings yields and 10-year Treasury yields is a statistical artifact of the period from 1982 to the late 1990’s, during which U.S. stocks moved from profound undervaluation (high earnings yields) to extreme overvaluation (depressed earnings yields). The Fed Model implicitly assumes that stocks experienced only a small change in “fair valuation” during this period (despite the fact that stocks achieved average annual returns of nearly 20% for 18 years), and attributes the change in earnings yields to a similar decline in 10-year Treasury yields over this period.

Unfortunately, there is nothing even close to a one-to-one relationship between earnings yields and interest rates in long-term historical data. Why doesn’t Wall Street know this? Because data on forward operating earnings estimates has only been compiled since the early 1980’s. There is no long-term historical data, and for this reason, the “normal” level of forward operating P/E ratios, as well as the long-term validity of the Fed Model, has remained untested.

Ruh roh. The Fed model is not predictive? What is? Hussman continues:

… [T]he profile of actual market returns – especially over 7-10 year horizons – looks much like the simple, humble, raw earnings yield, unadjusted for 10-year Treasury yields (which are too short in duration and in persistence to drive the valuation of stocks having far longer “durations”).

On close inspection, the Fed Model has nearly insane implications. For example, the model implies that stocks were not even 20% undervalued at the generational 1982 lows, when the P/E on the S&P 500 was less than 7. Stocks followed with 20% annual returns, not just for one year, not just for 10 years, but for 18 years. Interestingly, the Fed Model also identifies the market as about 20% undervalued in 1972, just before the S&P 500 fellby half. And though it’s not depicted in the above chart, if you go back even further in history, you’ll find that the Fed Model implies that stocks were about as “undervalued” as it says stocks are today – right before the 1929 crash.

Yes, the low stock yields in 1987 and 2000 were unfavorable, but they were unfavorable without the misguided one-for-one “correction” for 10-year Treasury yields that is inherent in the Fed Model. It cannot be stressed enough that the Fed Model destroys the information that earnings yields provide about subsequent market returns.

The chart below presents the two versions of Hussman’s calculation of the equity risk premium along with the annual total return of the S&P 500 over the following decade.

Source: Hussman, Investment, Speculation, Valuation, and Tinker Bell (March 2013)

That’s not a great fit. The relationship is much less predictive than the other models I’ve considered on Greenbackd over the last month or so (see, for example, the Shiller PE, Buffett’s total market capitalization-to-gross national product, and the equity q ratio, all three examined together in The Physics Of Investing In Expensive Markets: How to Apply Simple Statistical Models). Hussman says in relation to the chart above:

… [T]he correlation of “Fed Model” valuations with actual subsequent 10-year S&P 500 total returns is only 47% in the post-war period, compared with 84% for the other models presented above [Shiller PE with mean reversion, dividend model with mean reversion, market capitalization-to-GDP]. In case one wishes to discard the record before 1980 from the analysis, it’s worth noting that since 1980, the correlation of the FedModel with subsequent S&P 500 total returns has been just 27%, compared with an average correlation of 90% for the other models since 1980. Ditto, by the way for the relationship of these models with the difference between realized S&P 500 total returns and realized 10-year Treasury returns.

Still, maybe the Fed Model is better at explaining shorter-term market returns. Maybe, but no. It turns out that the correlation of the Fed Model with subsequent one-year S&P 500 total returns is only 23% –  regardless of whether one looks at the period since 1948 (which requires imputed forward earnings since 1980), or the period since 1980 itself. All of the other models have better records. Two-year returns? Nope. 20% correlation for the Fed Model, versus an average correlation of 50% for the others.

Are stocks cheap on the basis of the Fed model? It seems so. Should we care? No. I’ll leave the final word to Hussman:

Over time, Fed Model adherents are likely to observe behavior in this indicator that is much more like its behavior prior to the 1980’s. Specifically, the Fed model will most probably creep to higher and higher levels of putative “undervaluation,” which will be completely uninformative and uncorrelated with actual subsequent returns.

The popularity of the Fed Model will end in tears. The Fed Model destroys useful information. It is a statistical artifact. It is bait for investors ignorant of history. It is a hook; a trap.

Hussman wrote that in August 2007 and he was dead right. He still is.

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Corporate profit margins are presently 70 percent above the historical mean going back to 1947, as I’ve discussed earlier (see, for example, Warren Buffett, Jeremy Grantham, and John Hussman on Profit, GDP and Competition). John Hussman attributes it to the record negative low in combined household and government savings:

The deficit of one sector must emerge as the surplus of another sector. Corporations benefit from deficit spending despite wages at record lows as a share of economy.

John Hussman spoke recently at the 2013 Wine Country conference. Here he describes the relationship between corporate profits, and government, and household savings (starting at 22.08):

Hussman’s whole talk is well worth hearing.

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h/t Meb Faber

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Ratio of Corporate Profits-to-GDP and Returns (1947 to Present)

Source: Hussman Weekly Comment “Taking Distortion at Face Value,” (April 8, 2013)

Warren Buffett, 1999

[F]rom 1951 on, the percentage settled down pretty much to a 4% to 6.5% range.

In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.

— Warren Buffett, Mr. Buffett on the Stock Market (November 1999)

Jeremy Grantham, 2006

Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.

— Jeremy Grantham, Barron’s (c. 2006), via Katsenelson, The Little Book of Sideways Markets.

John Hussman, 2013

In general, elevated profit margins are associated with weak profit growth over the following 4-year period. The historical norm for corporate profits is about 6% of GDP. The present level is about 70% above that, and can be expected to be followed by a contraction in corporate profits over the coming 4-year period, at a roughly 12% annual rate. This will be a surprise. It should not be a surprise.

— John Hussman, Two Myths and a Legend (March 11, 2013)

h/t Butler|Philbrick|Gordillo and Associates

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In The Siren’s Song of the Unfinished Half-Cycle John Hussman has a great annotated chart comparing the ten-year returns estimated by the Shiller PE to the actual market returns that emerged over the following ten years from each estimate (from 1940 to present):

Hussman estimates the ten-year return using a simple formula:

Shorthand 10-year total return estimate = 1.06 * (15/ShillerPE)^(1/10) – 1 + dividend yield(decimal)

He justifies his inputs to the simple formula as follows:

Historically, nominal GDP growth, corporate revenues, and even cyclically-adjusted earnings (filtering out short-run variations in profit margins) have grown at about 6% annually over time. Excluding the bubble period since mid-1995, the average historical Shiller P/E has actually been less than 15. Therefore, it is simple to estimate the 10-year market return by combining three components: 6% growth in fundamentals, reversion in the Shiller P/E toward 15 over a 10-year period, and the current dividend yield. It’s not an ideal model of 10-year returns, but it’s as simple as one should get, and it still has a correlation of more than 80% with actual subsequent total returns for the S&P 500.

Here is Hussman’s application of the simple formula to several notable points on the chart and comparison to the subsequent returns:

For example, at the 1942 market low, the Shiller P/E was 7.5 and the dividend yield was 8.7%. The shorthand estimate of 10-year nominal returns works out to 1.06*(15/7.5)^(1/10)-1+.087 = 22% annually. In fact, the S&P 500 went on to achieve a total return over the following decade of about 23% annually.

Conversely, at the 1965 valuation peak that is typically used to mark the beginning of the 1965-1982 secular bear market, the Shiller P/E reached 24, with a dividend yield of 2.9%. The shorthand 10-year return estimate would be 1.06*(15/24)^(1/10)+.029 = 4%, which was followed by an actual 10-year total return on the S&P 500 of … 4%.

Let’s keep this up. At the 1982 secular bear low, the Shiller P/E was 6.5 and the dividend yield was 6.6%. The shorthand estimate of 10-year returns works out to 22%, which was followed by an actual 10-year total return on the S&P 500 of … 22%. Not every point works out so precisely, but hopefully the relationship between valuations and subsequent returns is clear.

Now take the 2000 secular bull market peak. The Shiller P/E reached a stunning 43, with a dividend yield of just 1.1%. The shorthand estimate of 10-year returns would have been -3% at the time, and anybody suggesting a negative return on stocks over the decade ahead would have been mercilessly ridiculed (ah, memories). But that’s exactly what investors experienced.

The problem today is that the recent half-cycle has taken valuations back to historically rich levels. Presently, the Shiller P/E is 22.7, with a dividend yield of 2.2%. Do the math. A plausible, and historically reliable estimate of 10-year nominal total returns here works out to only 1.06*(15/22.7)^(.10)-1+.022 = 3.9% annually, which is roughly the same estimate that we obtain from a much more robust set of fundamental measures and methods.

Simply put, secular bull markets begin at valuations that are associated with subsequent 10-year market returns near 20% annually. By contrast, secular bear markets begin at valuations like we observe at present. It may seem implausible that stocks could have gone this long with near-zero returns, and yet still be at valuations where other secular bear markets have started – but that is the unfortunate result of the extreme valuations that stocks achieved in 2000. It is lunacy to view those extreme valuations as some benchmark that should be recovered before investors need to worry.

The actual return deviates from the estimated return at several points, including the most recent ten-year period from 2002. Hussman comments:

Note that there are a few points where the estimate of prospective market returns would have differed from the actual market returns achieved by the S&P 500 over the following decade. These deviations happen to be very informative. When actual returns undershoot the estimate from a decade earlier, it is almost always because stocks have moved to significant undervaluation. When actual returns overshoot the estimate from a decade earlier, it is almost always because stocks have moved to significant overvaluation. Note the overshoot of actual market returns (versus expected) in the decade since 2002. The reason for this temporary overshoot is clear from the chart at the beginning of this weekly comment: the most recent 10-year period captures a trough-to-peak move: one full cycle plus an unfinished bull half-cycle.

While Hussman’s formula is exceedingly simple, with a correlation of more than 0.8 it’s also highly predictive. It’s currently estimating very attenuated returns, and investors should take note.

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My piece on S&P 500 forward earnings estimates and the overvaluation of the market generated a number of heated emails and comments. I didn’t know that it was so controversial that the market is expensive. I’m not saying that the market can’t continue to go up (I’ve got no idea what the market is going to do). My point is that there are a variety of highly predictive, methodologically distinct measures of market-level valuation (I used the Shiller PE and Tobin’s q, but GNP or GDP-to-total market capitalization below work equally as well) that point to overvaluation.

The popular price-to-forward operating earnings measure does not point to overvaluation, but is flawed because forward operating earnings are systematically too optimistic. It’s simply not predictive, mostly because it fails to take into account the highly mean reverting nature of profit margins. Here’s John Hussman from a week ago in his piece Investment, Speculation, Valuation, and Tinker Bell (March 18, 2013):

From an investment standpoint, it’s important to recognize that virtually every assertion you hear that “stocks are reasonably valued” is an assertion that rests on the use of a single year of earnings as a proxy for the entire long-term stream of future corporate profitability.  This is usually based on Wall Street analyst estimates of year-ahead “forward operating earnings.” The difficulty here is that current profit margins are 70% above the long-term norm.

Most important, the level of corporate profits as a share of GDP is strongly and inversely correlated with the growth in corporate profits over the following 3-4 year period.

While I believe the Shiller PE and Tobin’s to be predictive, there are other measures of market valuation that perform comparably. Warren Buffett’s favored measure is “the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP.” Here he is in a 2001 interview with Fortune’s Carol Loomis:

[T]he market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP… has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.

A quick refresher: GDP is “the total market value of goods and services produced within the borders of a country.” GNP is “is the total market value of goods and services produced by the residents of a country, even if they’re living abroad. So if a U.S. resident earns money from an investment overseas, that value would be included in GNP (but not GDP).” While the distinction between the two is  important because American firms are increasing the amount of business they do internationally, the actual difference between GNP and GDP is minimal as this chart from the St Louis Fed demonstrates:

FRED Graph

GDP in Q4 2012 stood at $15,851.2 billion. GNP at Q3 2012 (the last data point available) stood at $16,054.2 billion. For our present purposes, one substitutes equally as well for the other.

For the market value of all publicly traded securities, we can use The Wilshire 5000 Total Market Index. The index stood Friday at $16,461.52 billion. The following chart updates in real time:

Chart

Here are the calculations:

  • The current ratio of total market capitalization to GNP is 16,461.52 / 16,054.2 or 103 percent.
  • The current ratio of total market capitalization to GDP is 16,461.52 / 15,851.2 or 104 percent.

You can undertake these calculations yourself, or you can go to Gurufocus, which has a series of handy charts demonstrating the relationship of GDP to Wilshire total market capitalization:

Chart 1. Total Market Cap and GDP

GDP WIlshire Total Market

Chart 1 demonstrates that total market capitalization has now exceeded GDP (note the other two auspicious peaks of total market capitalization over GDP in 1999 and 2007).

Chart 2. Ratio of Total Market Capitalization and GDP

Total Market Cap GDP Ratio

Chart 2 shows that the current ratio is well below the ratio achieved in the last two peaks (1999 and 2007), but well above the 1982 stock market low preceding the last secular bull market.

But, so what? Is the ratio of total market capitalization to GDP predictive?

In this week’s The Hook (March 25, 2013) Hussman discusses his use of market value of U.S. equities relative to GDP, which he says has a 90% correlation with subsequent 10-year total returns on the S&P 500:

Notably, the market value of U.S. equities relative to GDP – though not as elevated as at the 2000 bubble top – is not depressed by any means. On the contrary, since the 1940’s, the ratio of equity market value to GDP has demonstrated a 90% correlation with subsequent 10-year total returns on the S&P 500 (see Investment, Speculation, Valuation, and Tinker Bell), and the present level is associated with projected annual total returns on the S&P 500 of just over 3% annually.

Here’s Gurufocus’s comparison of predicted and actual returns assuming three different ratios (TMC/GDP = 40 percent, 80 percent, and 120 percent) at the terminal date:

Chart 3. Predicted and Actual Returns

Predicted and Actual Returns GDP Total Market Cap

Chart 3 shows the outcome of three terminal ratios of total market capitalization to GDP. Consider the likelihood of these three scenarios:

  1. A terminal ratio of 120 percent (equivalent to the 1999 to 2001 peak) leads to annualized nominal returns of 8.1 percent over the next 10 years.
  2. A terminal ratio of 80 percent (the long-run average) leads to annualized nominal returns of 3 percent over the next 10 years.
  3. A terminal ratio of 40 percent (approximating the 1982 low of 35 percent) leads to annualized nominal returns of -5 percent over the next 10 years.

For mine, 1 seems less likely than scenarios 2 or 3, with the long run mean (scenario 2) the most likely. For his part, Buffett opines:

For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire.

Gurufocus’s 80-percent-long-run-average calculation agrees with Hussman’s calculation of average annualized market return of 3%:

As of today, the Total Market Index is at $ 16461.5 billion, which is about 104.3% of the last reported GDP. The US stock market is positioned for an average annualized return of 3%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 2%.

Here’s Buffett again:

The tour we’ve taken through the last century proves that market irrationality of an extreme kind periodically erupts–and compellingly suggests that investors wanting to do well had better learn how to deal with the next outbreak. What’s needed is an antidote, and in my opinion that’s quantification. If you quantify, you won’t necessarily rise to brilliance, but neither will you sink into craziness.

On a macro basis, quantification doesn’t have to be complicated at all. Below is a chart, starting almost 80 years ago and really quite fundamental in what it says. The chart shows the market value of all publicly traded securities as a percentage of the country’s business–that is, as a percentage of GNP. The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago the ratio rose to an unprecedented level. That should have been a very strong warning signal.

The current ratios of total market capitalization to GNP and GDP should be very strong warning signals. Further, that they imply similar returns to the Shiller PE and Tobin’s q, suggests that they are robust.

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Yesterday I looked at John Hussman’s method for estimating the long-term returns on stocks. The long-term return on a security consists of two parts: income (from dividends or interest payments), and capital gains (from price changes). For any future stream of income, the higher the price you pay , the lower the annual rate of return you will earn. 

Hussman provides the following equation to mathematically estimate the total return on stocks over any future time horizon (annualized):

(1+g)(Original Yield/Terminal Yield)1/N – 1 + (Original + Terminal)/2

Where Original Yield is the original dividend yield (in decimal form), Terminal Yield is the dividend yield expected at the end of the holding period, N is the holding period in years, and g is the growth rate of dividends over the holding period.

Here’s my calculation. If I assume a dividend growth rate of 6 percent (about the long-run average*), the current S&P 500 dividend yield of 2.1 percent (from multpl.com), a terminal S&P 500 dividend yield of 4 percent (Hussman says that the dividend yield on stocks has historically averaged about 4 percent), the expected nominal return over ten years is 2.4 percent annually.

(1+0.06)(0.021/0.04)1/10 – 1 + (0.021 + 0.04)/2 = 0.02435

Ugly.

If I use multpl.com‘s mean and average long-term S&P 500 dividend yields of 4.46 and 4.39 percent respectively it gets uglier still, so I’m not going to bother.

Over 20 years the nominal return rises to 5.7 percent, and over 30 years 6.8 percent.

Still too ugly.

Hussman last calculated the 10-year S&P 500 total returns to be about 5.2 percent annually, and offers the following:

As a rule of thumb, a 1% market decline in a short period of time tends to increase the prospective 10-year return, not surprisingly, by about 0.1%. However, that approximation is less accurate over large movements or over extended periods of time, where growth in fundamentals and compounding effects become important.

The market is approximately flat since Hussman wrote his article on May 21, so the market decline should have had no impact. To get to Hussman’s 5.2 percent with my inputs, we have to assume a 9 percent growth rate (bullish!):

(1+0.09)(0.021/0.04)1/10 – 1 + (0.021 + 0.04)/2 = 0.05248

Or a terminal yield of 2.9 percent (still bullish):

(1+0.06)(0.021/0.0288)1/10 – 1 + (0.021 + 0.0288)/2 = 0.05194

I’ve got no idea why my calculation differs from Hussman’s. I’m all ears if anyone has any suggestions. Either way, even with outrageously bullish assumptions, 5.2 percent is not a great return. It’s about half the historical return of 10 percent. There are other methods of calculating expected returns that I’ll look at tomorrow.

* Hussman says:

Historically, earnings, dividends, revenues, book values and other stock market fundamentals have grown at a rate of 6% annually. Earnings are the most volatile of these, sometimes growing from trough-to-peak at rates approaching 20% annually, and sometimes plunging from peak-to- trough at rates approaching -20% annually. In fact, historically, earnings have been even more volatile than prices themselves. When measured from peak-to-peak or trough-to-trough however, earnings show exactly the same sturdy 6% annual growth rate that other stock market fundamentals exhibit. Over the past century, the highest growth rates over any 30-year period were 6.3% annually for dividends, and 7.8% for earnings (trough to peak).

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There are a number of studies on the estimation of long-term returns to stocks. Ignoring the empirical research momentarily, the best explication of the estimation of long-term returns is by John Hussman in his article Valuations Matter. The logic is  straight forward.

According to Hussman, the long-term return on a security consists of two parts: income (from dividends or interest payments), and capital gains (from price changes). For any future stream of income, the higher the price you pay , the lower the annual rate of return you will earn:

Consider, for simplicity, a 30-year zero-coupon bond with a face value of $100. If the bond is priced at a yield-to-maturity of 10%, it will cost you $5.73 today. Over the coming 30 years, the price will advance to $100, and your annualized return will be 10%. Just what you bargained for.

But what happens in the meantime? Suppose that over the first 10 years of your holding period, interest rates decline, and the yield-to-maturity on your bond falls to 7%. With 20 years remaining to maturity, the price of the bond will be $25.84. Now here’s the crucial point. Even though the yield-to-maturity for the remaining life of the bond is just 7%, and the yield-to- maturity you bargained for when you bought the bond was only 10%, the return you have earned over the first 10 years is an impressive 16.26%!

By holding the security during a period when the yield-to-maturity is falling, you not only earn a return that is higher than the original yield to maturity, you earn a return that is dramatically higher than the future yield-to-maturity!

Now, the rest of the story. Over the remaining 20 years of the bond, you will not earn 16.26% annually, but 7% annually. If you do the math, you will find that over the entire 30 year holding period, you will have made — surprise — 10% annually. Just what you bargained for originally.

Here Hussman applies the same logic to the stock market:

For stocks, the “yield-to-maturity” comes from two components: income plus capital gain. The income component is simply the dividend yield. Assume initially that the dividend yield is held constant over time (we’ll relax this assumption in a moment). If the dividend yield (Dividend/Price) is constant, then by definition, prices must grow at exactly the same rate as dividends grow. By definition, when the dividend yield is unchanged between the date you buy stocks and the date you sell them, your total return equals the dividend yield (income) plus the growth rate of dividends (capital gain).

As a rule, a good estimate of the “yield-to-maturity” on stocks is the 6% long term growth rate plus the dividend yield. But remember, your actual return will only be equal to this value if the dividend yield stays constant over the period that you hold stocks. As we saw in our example, if the yield falls during the period you are holding stocks, your actual return will be even higher than the yield-to-maturity that you bargained for. On the other hand, if the yield on stocks rises over your holding period, your actual return will be even less than the yield-to-maturity you bargained for.

Historically, the dividend yield on stocks has averaged about 4%, and has fluctuated both above and below this 4% figure. As a result, the historical average return on stocks has typically been 6% + 4% = 10%. That’s precisely where that 10% “historical return” on stocks comes from.

Hussman provides the following equation to mathematically estimate the total return on stocks over any future time horizon (annualized):

(1+g)(Original Yield/Terminal Yield)1/N – 1 + (Original + Terminal)/2

Where Original Yield is the original dividend yield (in decimal form), Terminal Yield is the dividend yield expected at the end of the holding period, N is the holding period in years, and g is the growth rate of dividends over the holding period.

I find the logic appealing, but we should also consider how well the equation predicts the subsequent performance of the market. Here’s a chart from a recent Weekly Market Comment showing the projections for 10-year annual total returns on the S&P 500 versus actual subsequent 10-year total returns:

wmc120326a.jpg

Seems like a pretty good fit. The kicker: Hussman wrote his “Valuations Matter” article in June 1998, at which time he said of the market:

Currently, assuming dividend growth speeds up to a 6% rate and that the dividend yield is still just 1.4% in the future, the long term total return on stocks will be 7.4%. But here’s a more likely result: suppose the future dividend yield rises even a bit, even to just 2%. If that happens over the next 5 years, investors will earn a total return of zero over those 5 years. Over the next 10 years: just 4% annually. Over the next 20 years: 5.8% annually. Over the next 30 years: 6.4% annually. If the dividend yield rises to the historical average of 4% even 30 years from now, investors will have earned a total return of just 5% annually over that span. Consider that figure long and hard before trusting your retirement plans to a buy-and-hold approach in stocks.

It’s now 14 years since Hussman wrote the article. As difficult as it would been to believe it at the time, if anything, it seems at this point that Hussman was too optimistic.

Hussman’s rule of thumb seems like a sensible one:

You want to own stocks when the yield on stocks is high, or while favorable market action (interest rates, inflation, market breadth) are uniformly driving the yield downward. Beware when neither is true.

Tomorrow, I’ll show some estimates for the market as it stands now.

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