"There is enormous risk, in my view, in the temptation to accept zero interest rates and low single-digit prospective market returns as an enduring characteristic of the financial markets while ignoring the unsustainable distortions that have produced this environment."
"(...)I believe that normalized valuations present an accurate view of prospective market returns here. There is enormous risk, in my view, in the temptation to accept zero interest rates and low single-digit prospective market returns as an enduring characteristic of the financial markets while ignoring the unsustainable distortions that have produced this environment. In the short-run, there may be near-term returns available in reaching for yield by accepting greater credit risk, or speculating on periodic relief rallies even at present valuations. Those prospects, however, don’t change our view that stocks remain in a secular bear market.
A bit of arithmetic is instructive here. Suppose that future economic growth remains similar to past growth, and normalized earnings grow by about 6% annually. Assume also that at some point, let’s say 12 years into the future, the Shiller P/E simply touches 10 – still above the 5-7 multiples reached in prior secular bears (excluding the bubble period since the late-1990's, the historical norm for the Shiller P/E is less than 15). Given a dividend yield of 2.3%, and a present Shiller P/E about 21, we can estimate the 12-year prospective return on the S&P 500 on those assumptions at:
(1.06)*(10/21)^(1/12)+.023*(21/10+1)/2 – 1 = 3.2% annually. (...)"
By John P. Hussman, Ph.D.
President, Hussman Investment Trust
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