Image Credit: All images courtesy of Aleph Blog || Lookout below!
I’ll keep this brief, as I’ve said it so many times before. This market is on borrowed time. The only comparable period for this market is from the fourth quarter of 1999 to the third quarter of 2000 — the dot-com bubble, which was another period of speculation fueled by loose monetary policy. Here’s a picture of what price returns were like from that era over the next ten years (but with a 2% dividend yield).
And we are touching the sky at present. Though at the end of the quarter, the S&P 500 was priced to return -0.91%/year over the next ten years, at present that value is -1.41%/year. None of these figures are adjusted for inflation. At the recent high of 4,536.95 on September 2nd, the expected return was -1.73%/year for the next ten years. This graph shows how we are touching the sky:
The actual line is touching the maximum line. The future line gives an idea of how valuations could normalize over ten years.
The Dow 36,000 crowd will get their day in the sun, maybe even this year, or it might not happen until 2035. But even if it hits the level, it’s unlikely that it will stay above that level for most of the rest of the next 10 years.
I’ll close with a quote from something I wrote recently:
Though interest rates are low, they are not negative. 10-year investment grade bonds are competitive against domestic stocks at this point. Even if you are losing against inflation, you are losing less against inflation than the market as a whole. Same for cash. I don’t think that there is no alternative. Here are the alternatives:
- Investment grade bonds (market duration)
- Cash
- Value stocks
- Cyclical stocks
- Foreign stocks
- Emerging market stocks and bonds
So consider the alternatives, and consider hedging. I can’t nuance this anymore, as we are in uncharted waters. We are touching the sky.
And I think even as the market falls, value should do well, as it did in 2000-2001. This piece from Bob Arnott at Research Affiliates makes a good case for it.
So play it safe; it’s a messy speculative world out there. It wouldn’t take much for it to turn ugly.
Could you please provide a chart of the S&P 500 on a linear scale based on your recent article with the title “Estimating Future Stock Returns, June 2021 Update”?
No. It would not make sense.
Novice investor question: when you mention investment grade bonds as an alternative to equities, would that include bond funds? Also, would a small quantity of gold (say 5% of portfolio) serve as a valid alternative?
That would include investment grade bond funds. I don’t own any gold, but it is not a bad investment just keep it to less than 25% of your portfolio. If you use the search function at my blog, you will get a full view of my thoughts on gold. I prefer stocks overall but gold is good for long-term inflation protection. It is a form of storage.