“The real problem is that a decade of experimental distortion encouraged unprecedented speculation in every conventional asset class, not to mention fringe speculation in assets detached from any standard of value, including meme stocks, pictures of bored monkeys, and digital Pokémon posing as ‘currency.’ As with every similar episode across history, the unwinding of this bubble in the form of financial crisis is already quietly baked in the cake.”
– Dr. John Hussman, “Central Bankers Wandering in the Woods” September 2023
Today we update Treasury bond and U.S. stock market forward return estimates.
Treasury bond return estimates are very easy. It’s simply the current yield offered by the bonds… assuming the U.S. government doesn’t default of course. Here are the current annualized yields for various maturities:
1-year: 5.5%
3-year: 4.9%
5-year: 4.6%
10-year: 4.5%
20-year: 4.8%
“Indeed, a century of market history suggests that investors should expect S&P 500 total returns to lag Treasury bond returns for something on the order of 12-18 years.”
– Dr. John Hussman
As shown above, the expected return on the 10-year Treasury bond 4.5% and 20-year is 4.8%. Dr. Hussman is, therefore, suggesting the U.S. stock market, if history is any guide, will return less than around 4.5% annualized over the next 12-18 years.
That aligns with one of my own forward return analyses as well (below), which shows a potential range of annualized returns over the next 12 years for the S&P 500 of (4.1%) to 5.0% with an average expectation of about 1%.
Even an optimistic case in the matrix below has the S&P 500 barely matching the performance of Treasury bonds over the next 12 years with a lot more risk and volatility in the S&P 500.
For an explanation of the methodology of this return matrix go to my website and bookmark this page as I will keep it updated each quarter: https://melottefa.com/return-projections/
In Dr. Hussman’s chart below the blue line shows the actual value of the S&P 500 Index.
The green line shows the level of the S&P 500 index that is consistent with 10% expected annual returns. Today, in order to be priced to deliver 10% annual returns, the S&P 500 would have to be $1,650, or over 60% lower than current levels!
Observe there are multi-decade periods where the blue line falls below the green line (undervalued) and other periods where the blue line is above the green line (overvalued). Further observe the cyclical nature of overvaluation to undervaluation.
The dotted blue line shows the level of the S&P 500 index that is consistent with a 5% premium over and above the 10-year Treasury yield, which is consistent with the historical risk premium. Today, in order to be priced to deliver a 5% annual premium over Treasury bonds, the S&P 500 would have to be $1,800, or 60% lower than current levels.
“The yellow bubbles show periods when our most reliable valuation measures implied S&P 500 total returns below Treasury bond yields.”
Finally, the red brackets show the periods where the S&P 500 total return did in fact lag Treasury bond returns. We can see it happened after every single yellow bubble. The four underperformance periods lasted 21 years, 19 years, 22 years, and 13 years. So, these are not brief events. Treasury bonds can, and have, outperform stocks for well over a decade at a time.
Hopefully this makes it clear why I maintain a relatively conservative bias within portfolios. The record of history seems quite clear. Obviously, past performance is no guarantee of future results, but it would be foolish and arrogant to ignore history or simply write it off.
Disclosures:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.
This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.
