John P. Hussman, Ph.D.
From a long-term perspective, we believe that investors have a strong opportunity here to reduce equity risk near the peak of a market cycle that has reached the second greatest overvaluation extreme in U.S. history (second only to the 2000 peak). Among the valuation measures we’ve found most strongly correlated with actual subsequent S&P 500 10-12 year total returns, market valuations have pushed to a level that is more than double their reliable historical norms. From these levels, we fully expect 10-12 year S&P 500 nominal total returns near zero, with negative real returns after inflation.
Notably, the completion of every market cycle in history has taken the most reliable equity valuation measures toward or below their historical norms - levels associated with subsequent total returns approaching 10% annually. That includes two cycle completions since 2000, as well as cycles prior to 1960 when interest rates regularly hovered near present levels. After an unusually extended speculative half-cycle, we doubt that the completion of the present cycle will be any different.
It has taken the third speculative bubble in 16 years to bring the nominal total return of the S&P 500 since March 2000 to just 3.6% annually.
It is not an act of pessimism to reject the notion that investors are doomed, from here, to suffer permanently elevated valuations and permanently dismal long-term returns. No. It is an act of historically-informed optimism.
Value investor Seth Klarman once wrote that “value investing is at its core the marriage between a contrarian streak and a calculator.” Unfortunately, at every speculative peak, a different message emerges, suggesting that the calculator is broken, that “this time is different,” and that “the old valuation measures no longer apply.”DYI Comments: "The marriage between a contrarian streak and a calculator" is exactly DYI's weighted formula premise. Currently valuations are so high based on DYI's favorite matrix dividends we've been "kick out of the market" and rightfully so! How high? 104% greater than the mean expressed in price to dividends(S&P 500). Below is a chart for the Dow Jones showing the history all the way back to 1900. The Dow along with the S&P 500 have valuations "jacked up" due to our world wide central banks down to sub atomic low and now with many European countries who gone negative forcing savers into risk assets.
As of 3-15-16 Dow Jones 34 times dividends
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