A brilliant economist, Irving Fisher, is, unfortunately, best known for one of the worst stock predictions of all time.

On October 16, 1929 in a New York Times article Mr. Fisher was quoted, “Stock prices have reached what looks like a permanently high plateau…” after the Dow Jones Industrial Average increased six-fold over the preceding eight years during the Roaring Twenties.

Over the next month, the Dow lost almost half its value causing Mr. Fisher to go broke. The Dow ultimately went on to lose 89% of its value from its peak in late-1929 to its bottom in the summer of 1932.

In Jennifer Latson’s Time article titled, “The Worst Stock Tip in History,” she says that Mr. Fisher would later go on to develop a theory for the crash, which was “overly liberal credit policies that encouraged Americans to take on too much debt.”

Because he was discredited, his theory didn’t gain much traction until later after his death when Milton Friedman resurrected and expanded on the theory.

Sound familiar?

It certainly should, we’ve had well over a decade of interest rate suppression and stimulus combined with massive federal deficits to spur spending, incentivize borrowing and encourage speculation leading to a tremendous bubble in stocks, real estate and other risk assets.

So, before we get to stock market metrics, let’s look at some debt metrics.

Above shows the US Federal Debt from 1899 to September of 2023 where it stood at $33.2 trillion. Note that the current debt is $34.2 trillion so we’ve added $1 trillion in the five months since.

As a percentage of GDP, the US public debt stands at about 120% of GDP up from 60% of GDP in 2006/2007. We haven’t seen this level of federal debt since the 1940s when we were fighting World War II.

However, the difference between now and then is that the private sector had VERY LITTLE debt in the 1940s. The total public and private debt stood at just 175% of GDP. In other words, there was a lot more capacity in the private sector to soak up government debt and fund the war effort.

No such capacity or cushion exists today as the private sector is also more leveraged than ever before with the total public and private debt to GDP now at 350%!

Onto stock market metrics.

The price of an asset must ultimately reflect cash flows the asset is expected to provide. This is where valuations come in helping to determine whether an asset, or an asset class, is over-valued, fairly-valued or under-valued.

I updated my matrix of forward returns….

Notice that a reasonable range of expected returns for the S&P 500 over the next twelve years is about -5% to about 4% annualized with an average expectation of 0.0%.

The returns are calculated by simply applying various sales growth rates to current S&P 500 sales per share, which has averaged around 4% per year, then applying various profit margins of 6% to 10% to those sales to derive a future earnings per share, then, finally, applying 14x to 20x multiples to those earnings (i.e. P/E ratio, or price/earnings).

The end result is range of values for the S&P 500 in twelve years’ time so we compare that terminal value to today’s price and then add the current dividend yield to get a range of potential total returns. No complex calculus needed.

Bottom line…it’s not good. In fact, amongst the worst 12-year outlooks in history. Certainly appears as though investors continue to severely overpay for U.S. stocks.

Meanwhile, a basic, safe 3-year treasury bill yields about 4.3%.

Since we kicked off this commentary talking about 1929, let’s look at one measure of stock market valuations going back to 1929 from Dr. John Hussman

Current valuations are the highest they’ve ever been except for brief periods surrounding the 1929 and 2022 peaks.

On X, Dr. Hussman shows that the “likely equity risk-premium over the coming 10-12 years is now worse than 1929 and 1999.”

As always, a reminder that valuations are not at all reliable for predicting short-term market movements. In fact, I don’t believe there is anything or anyone that can reliably predict short-term market movements.

The purpose of understanding valuations is to understand risk/reward over the next 10-12 years and to adjust our expectations accordingly. This information can also be applied within our Financial Plan to stress test various scenarios and help us make more informed financial decisions as opposed to blindly relying on generic rules of thumb or unrealistic historical return assumptions.



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.

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