The stock market has enjoyed a nice rally since mid-October so I figured it was a good time to see how things stand now.

In this commentary I’ll review:

  1. Brief technical update as the market is trading near a key level
  2. Price/Sales ratio and implication for future returns
  3. Updated Matrix of Returns

Technical Update

The U.S. stock market has been trading below it’s 200-day moving average since early-April. Before the recent rally the market was trading almost 17% below it’s 200-dma (down over 25% from its all-time peak), but the recent rally brought it back within 1% of the 200-dma and down just 16% from its all-time peak (before yesterday’s decline).

Notice how the market continues to rally back towards its 200-dma and then fail beginning a new down leg? This is common in bear markets. Refer to 2000-2001 and 2007-2008 charts below to see a similar pattern.

Price / Sales Ratio

I’ve written about the price / sales ratio previously. It’s simply the price of the S&P 500 divided by sales per share of the S&P 500. The purpose is to quickly understand how expensive (or cheap) the market is within its historical context using easy-to-access, pure data.

This ratio is highly correlated to future 10- and 12- year 500 returns (~-0.90)…far more correlated than the much more popular “Price / Earnings.”

The current price / sales ratio for the S&P 500 is about 2.4. So, how does that stack up and what does it imply for returns?

Well, based on the historical data plotted below by Dr. John Hussman, it appears that a 2.4 price/sales ratio has historically led to about a -5% to 0% annualized return over the subsequent ten years.

Some basic arithmetic using the P/S ratio implies about a 2% annual return for U.S. stocks over the next 12 years. Assuming a regression towards the long-term average of around 1.5x, 4% average annual sales growth, and a 1.8% annual dividend yield.

(1.5 / 2.4)^(1/12)*(1.04)-1+0.0182 = 1.83% annualized return

3% sales growth implies 0.9% annualized return and 5% sales growth implies 2.8% annualized return.

Updated Returns Matrix

Meanwhile, our matrix of returns shows a -3.6% to 5.4% annualized return over the next 12 years, with 1.2% expected (see below).

Now consider that short-term treasuries are yielding over 4% per year.


Long story short -> All the most reliable metrics (those with the greatest correlation to actual subsequent returns, most of which are not discussed in this brief commentary) tell the same story.

When we consider the market cycle it seems we’re still likely at the point where it makes sense to remain positioned conservatively until the stock market offers better potential compensation for the risk. This is why I continue to maintain a conservative bias in portfolios for the vast majority of clients (and for my personal portfolio).

Also, be sure that your Financial Plan, upon which you base your most important savings, investment and retirement decisions, are not simply relying on historical average returns for the next decade. Better decisions are made with realistic assumptions and expectations.

In the meantime, we’ll continue to be nimble as opportunities present themselves.

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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