Down goes the Dow

Gil Weinreich wrote:

Flagpole, for the record I was referring to staying away from that Hussman fund, or any Hussman fund for that matter. There are obviously better options, but GOI seems to think "it's different this time". Folly.

Ah. Ok.

Flagpole,

Again, I don't disagree with your advice. However, the author has a valid point, that the experience of the last 100 years is quite a bit different than the last twenty. In my view future buy and hold investors will need to save more and should expect lower returns.

Igy

Well it tells me that people are investing in equities because interest rates are so long but long term I look at price/earnings to eventually win out in a normal market where there isn't negative bond yields. These are strange times.

Ghost of Igloi wrote:

Flagpole,

Again, I don't disagree with your advice. However, the author has a valid point, that the experience of the last 100 years is quite a bit different than the last twenty. In my view future buy and hold investors will need to save more and should expect lower returns.

Igy

I get it that you are not disagreeing. I was just pointing out a flaw in the article's presentation. The author could be right, but all things tell me that any "expert" who is every proven right is just lucky, because they very often do not get predictions right on a regular basis.

Since I started investing in 1989, I have hear naysayers about the stock market pretty much non-stop since then, and every other year or so someone says that future returns won't be as great because it is now different. We heard that in spades when the Dow hit a low of 6400 in March 2009. I was in the market big time then and have steadily invested more since. It has been the biggest (longest and most consistent) boom of my investing life. Really glad I haven't listened to the naysayers.

topcat,

One of the excuses to support higher stock prices has been the low cost of capital. Also, the Fed Model, that compares that the dividend yield of stocks to the risk free rate, or the 10 Year Treasury, justifies rising equities. So, the view that higher rates somehow becomes supportive to higher stock prices runs counter to the view that has been held since 2012. It seems convenient to me that once faced with higher rates, those that want to believe that the market moves higher, invent another justification. I certainly hear your view but I don't buy it.

Igy

Uh, higher rates support higher stock prices? No one believes that.

Okay then if fundamentally to increase the price of a stock you need to increase earnings doesn't hold water, how does a person arrive at the proper price or value of a stock so as to protect on downside risk? How do you determine the correct price?

Flagpole,

Agreed, but just like you heard the naysayers in 2009, you have some ridiculous assumptions about equity and bond returns starting from today. In fact, if one wants to see prospective returns like you have seen since 2009, you must have mean reversion in price. One thing for sure if you buy and hold a 10 Year Treasury today you are going to get a 1.5% return over the next decade. If you buy and hold the SPY today, I would not count on the 2% return from just from the dividend over the same period. Monthly dollar cost averaging over the next decade, that is an entirely different question.

Igy

say,

Sure there are. Some analysts have said that rising cost of capital is a sign of an improving economy. Of course the market has risen on multiple expansion and not earnings, so hard to justify that belief.

Igy

topcat,

S&P 500 EPS have been falling since September 2014, down 18.5%. Since that time the S&P 500 Index value is up 11%. So the rise in the index has all been multiple expansion, or the willingness of investors to pay more for a unit of earnings. There are those that believe earnings will rebound from the current average of about $100 non-GAAP EPS to $135 next year. Of course a year ago the projections for 2016 were $132. A proper multiple for the S&P 500 would be about a PE of 15, and an index value of 1,500 ($100 x 15). That is about the level the S&P 500 was trading when non-GAAP EPS was $100 (09/30/2012).

Igy

Yes a multiple expansion but at some point in time will it not revert back to historical average ratio unless earnings improve, which was my original point.

topcat,

Yes, that is correct, sorry if I misinterpreted your point. In fact, you should want that because it insures better long term returns. To justify higher index level from here would have to be on the back of multiple expansion. Here are the S&P 500 non-GAAP Last Twelve Month (LTM) PEs for the last 18 quarters, using an estimate for the almost completed Q2 2016: 25.15, 23.82, 21.18, 21.74, 20.84, 20.12, 18.61, 19.01, 18.57, 18.45, 17.82, 17.66, 17.89, 16.49, 16.66, 15.49, 15.91, and 14.46. Non-GAAP S&P 500 LTM EPS for the same periods: $98.31, $98.61, $104.14, $108.30, $111.50, $113.01, $114.51, $111.83, $108.85, $107.30, $102.20, $99.28, $98.35, $96.82, $97.40, $98.69, $98.12, and $96.44.

Igy

Indeed. I know there are many indicators and philosophies people can study and follow. I usually look at the P/E because I understand it and it is simple and I have a simple mind.

Ghost of Igloi wrote:

Flagpole,

Agreed, but just like you heard the naysayers in 2009, you have some ridiculous assumptions about equity and bond returns starting from today. In fact, if one wants to see prospective returns like you have seen since 2009, you must have mean reversion in price. One thing for sure if you buy and hold a 10 Year Treasury today you are going to get a 1.5% return over the next decade. If you buy and hold the SPY today, I would not count on the 2% return from just from the dividend over the same period. Monthly dollar cost averaging over the next decade, that is an entirely different question.

Igy

1) What are my ridiculous assumptions on bond returns? I actually have NEVER mentioned bond returns and in fact I plan to be devoid of them when I retire (replacing that conservatism with 3 years of expenses liquid). If some people want to hold bonds (in retirement) as a safety against big stock drops, then that's not horrible, but I won't be one of them.

2) What are my ridiculous assumptions on stock returns? I have a spreadsheet that tracks all my investments, and I am right on 11% annual return since I started in 1989. I have a target range in my spreadsheet (colored columns) that is 6-9% going forward, so all of those less than I have received to date since 1989. At this point, I can retire in 10 more years at age 60 if my stuff stays FLAT, will likely work until 62 if the market goes down more than 2% during that time, and will retire anywhere between age 55 and 59 if it brings 6-9% depending on the return. Age 60 has been my retirement goal for about 10 years now, and I am on track for that even if the market goes down a little during the next 10 years. I am in that position due to consistent investing since 1989.

topcat,

You will hear discounting of its value, but if you believe, like I do, that valuations do matter, and mean reversion is a function of the market, you use it.

There are plenty of indicators used by market participants that have little correlation to future returns, but are convenient to support the view that stocks are not overvalued.

Igy

Flagpole,

Sorry, I could have phrased that better "there are" I did not mean "you" as in Flagpole. I believe that projecting a 10% historic equity return from today, is a rather bad bet.

Igy

Over what time frame? Obviously the law of averages tells us at some point it will be 10%, but it doesn't tell us when.

T,

You need to at least get to a fair value level on the S&P 500 which in my view is closed to 1,500.

Igy

Mr. T Bill wrote:

Over what time frame? Obviously the law of averages tells us at some point it will be 10%, but it doesn't tell us when.

"The law of averages says you will survive."