Complacency is the New Speculation....S&P 500 Dividend Yield 1.86%...Shiller PE10 is 25.95...With Rising Interest Rates and an Economy that is Long in the Tooth...All Point to an Over Blown Stock Market....

It Is Informed Optimism To Wait For The Rain 

John P. Hussman, Ph.D.

The depressed level of short-term interest rates does not change the arithmetic here. It simply offers investors additional discomfort – the choice of accepting risk in equities that are already intolerably overvalued, or to instead accept the certain prospect of near-zero near-term returns. For our part, we expect dramatically better investment opportunities to emerge over the completion of the present market cycle. It is optimism, not pessimism, about those future opportunities that leads us to avoid reaching for low-return, high-risk equity exposure here. Investors should only expect meaningful total returns to the extent that they wish to speculate that long-term prospective returns will be driven even lower than 2.2% annually (on a 10-year horizon).

It is the series of extreme instances over the past year that give investors the hope and delusion that historically reckless market conditions will lead only to further gains and greater highs. This is a mistake born of complacency in the face of a nearly uninterrupted, Fed-enabled 5-year market advance, and is the same mistake that was made in 2000 and again in 2007. By the time the present market cycle is completed, we expect the S&P 500 to be at least 40% lower than present levels. Only the reliance on historically unreliable valuation metrics, and what Galbraith called the “extreme brevity of financial memory” makes that assertion seem the least bit controversial.

DYI Comments:  John Hussman's article is hard hitting for almost every paragraph; well worth your time to read in its entirety.

As compared to DYI John is the optimist for my forecast is 45% to 60% decline.  Be as that may be for those who desire a bit of short hand cutting this market in half (50% decline) I would have no disagreement.

If stocks drop by more than 50% this would effectively more than double the current dividend to a 4.0% yield.  Future estimated 10 year returns would be enhanced significantly to the 9.4% return level.  Surprisingly despite a drop off of this magnitude stocks as measured by dividend yield would be at or slightly below its median yield of 4.36%.

Estimated 10yr return on Stocks

Using 5.4% as the historical growth rate of dividends and 4.0% as the ending yield.

Starting Yield*---------return**
1.0%-----------------------(-5.7%)
1.5%-----------------------(-1.7%) 
2.0%---------------1.3% You are Here
2.5%------------------------3.8%

3.0%------------------------5.9%
3.5%------------------------7.8%
4.0%---------------9.4% 
4.5%-----------------------10.9%

5.0%-----------------------12.3%
5.5%-----------------------13.6%
6.0%-----------------------14.8%
6.5%-----------------------15.9%

7.0%-----------------------17.0%
7.5%-----------------------18.0%
8.0%-----------------------19.0%

*Starting dividend yield of the S&P500-**10yr estimated average annual rate of return.

Keep your powder dry better values lie ahead for the patient value driven investor.  For the speculators this wait will seem like eternity for the real long term investor only a blink of an eye.

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 03/1/14

Active Allocation Bands 10% to 60%

45% - Cash -Short Term Bond Index - VGPMX

25% -Gold- Precious Metals & Mining - VBIRX

20% -Lt. Bonds- Long Term Bond Index - VBLTX

10% -Stocks- Equity Income Fund - VEIPX

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DYI