Valuations are Crucial

For

Market Success!

“Points of ‘secular’ undervaluation such as 1922, 1932, 1949, 1974 and 1982 typically occurred about 50% below historical mean valuations, and were associated with subsequent 10-year nominal total returns approaching 20% annually.  By contrast, valuations similar to 1929, 1965 and 2000 were followed by weak or negative total returns over the following decade.  That’s the range where we find ourselves today.”  

John Hussman of the Hussman Funds.

DYI:  If this chart was reworked to show for the massive profit margins thus eventually regressing back to the mean this indicator would be slightly higher than the 2000 top besting all records for the U.S. market on a valuation basis.  The 2000 top was labeled “The Great Insanity” by the late legendary investor John Templeton of the Templeton funds and very accurate in his description.  What name he would give this top would be a guess?  How about calling this “The Boundless Folly?!”  Whatever name that is eventually labeled in twenty years or so these future market historian will in the end have only one thing to say “What were these people thinking?”  DYI is anticipating a 60% to 75% market decline.  Whether it is achieved within one or two market cycles is up to debate.  Eventually the Shiller PE will bottom out when this secular market  decline ends at or below Shiller PE of 10!

Using the data of massive unsustainable profits margins when reworked places the Shiller PE at a breathtaking 48 to 1.  If 15 years from now stocks reside below 10 Shiller PE what would be your estimated average annual return?  Drum roll please!  Negative 3.43%...That’s right your money will have gone backwards for stocks purchased today or stocks held, go to sleep like Rip Van Winkle, waking 15 years from now your return will be very close to that average.  God forbid if an individual is retiring now with an all stock portfolio using a systematic with draw will send his or hers nest egg to zero in a short time frame.

Valuations are Crucial to Future Returns! 

   The chart above shows the historical returns at market major market turning points highlighting returns during over and undervalued markets and between over 10 year time periods.  Simply another way showing that once again valuations are crucial to stock market success!

DYI