J. Paul Getty Quote!
February 9, 2015
John P. Hussman, Ph.D.
Speculative yield-seeking has driven asset prices higher in recent years to the point where many asset classes now provide no risk premium at all. The most historically reliable equity valuation measures we identify (having a correlation of about 90% with actual subsequent 10-year total returns) remain about 112% above – more than twice – their pre-bubble norms. We presently estimate 10-year S&P 500 nominal total returns averaging just 1.6% annually. Yes, even less than the 1.9% yield-to-maturity on 10-year Treasury bonds. Even here, we’re assuming historically normal future nominal growth in revenues, nominal GDP and so forth of about 6% annually – see Ockham’s Razor and the Market Cycle for the arithmetic and long-term historical record of these estimates.
By our estimates, never in history, prior to the past 5 weeks, have the prospective 10-year nominal annual total returns of both stocks and Treasury bonds been below 2% at the same time. We currently project a 10-year nominal annual portfolio total return averaging only about 1.7% annually for anything close to a standard portfolio mix of equities, bonds and cash – regardless of how much diversification one has within each of those asset classes.DYI Comments: DYI's estimated 10 year return and Professor Hussman's are near the same.
Estimated 10yr return on Stocks
DYI's 10 year estimation is based exclusively on dividends (Dividend Yield Investor!). Dividends in the long run are why investor's as compared to speculator's purchase common stocks. The ability to either spend their dividends or compound them back into additional shares or make other investments. An investor's point of view, he or she makes their money when they buy based upon a quality company spouting a competitive dividend yield. Even today despite this high flying overvalued stock market there are quality companies (excellent balance sheets) that have a dividend yield 100% greater than the S&P 500. As you might expect due to the speculative nature of valuations there are very few of them.
Updated 1-20-15
THE DIVIDEND ROOM
Yield S&P 500 Dividend Yield 1.95%
Oil/Gas/Service
6.20% Sasol Limited symbol SSL
4.60% Helmerich & Payne symbol HP
4.20% Spectra Energy Partners SEP
4.10% Chevron Corp. symbol CVX
Industrial Metals & Minerals
6.50% Alliance Resource Partners LP symbol ARLP
6.50% Alliance Resource Partners LP symbol ARLP
Utilities
4.70% Companhia de Saneamento Basico symbol SBS
Apparel Stores
4.50% Guess' Inc. symbol GES
Tobacco Products
5.20% Universal Corp. symbol UVV
REIT - RETAIL
4.10% HMG/Courtland Properties symbol HMG
Financial Asset Management
4.60% Calanos Asset Management symbol CLMS
DYI recommends that you use our stock allocation formula to arrive at your allocation of stocks to bonds. Currently it is at 25% for stocks. For your cash holdings Vanguard's Short Term Bond Index symbol VBIRX or for those in a high tax bracket Vanguard's Limited Term Tax Exempt VMLTX.
Bond and Dividend Averages
Currently the U.S. stock market price to dividend ratio is now 126% higher than its average going back to 1871. Bonds price to interest ratio is a staggering 132% higher than its average as well. Those who purchase stocks and bonds today and then go to sleep like Rip Van Winkle to awake 10 years from now would be aghast at their dismal return. Returns are so poor going forward it will not matter if your stock/bond allocation is 70%/30%, 50%/50% or 30%/70% etc. there is no where to hind except in short term bonds. The only area that is a moderate buy is gold mining companies that have experienced a brutal bear market or oil/gas/servicing companies that have suffered their own bear market.
DYI's model portfolio remains very defensive
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 2/1/15
My secular sentiment indicators spells it out with money market funds at max-pessimism while waiting for the next recession to bottom out short term bonds and max out long term bonds. REIT's and stocks are either on top of the mountain (max-optimism) or just beginning their long journey to max-pessimism. Gold is the only standout with relative value.
Market Sentiment
The true value player knows of a not so secret weapon; PATIENCE! This period of time of massive overvaluation now going on 2 years plus is a blink of an eye. It also gives you time to shore up your personal finances plus build cash waiting for the next bear market to put money to work.
Till next time!
Kenneth E. Royer Editor /Chief Cook and Bottle Washer
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