Excerpt from fund manager John Hussman’s weekly essay on the US market:
It's clear that investors are eager to rely on hopes for further year-end strength, as well as hopes of economic strength and earnings growth. But if you look carefully at earnings (aside from the fact that year-to-year earnings growth have a roughly zero correlation with year-to-year market returns), you'll notice some of the widest profit margins and the largest share of corporate profits as a percentage of GDP in decades. These measures are highly cyclical, and have a very poor record of persisting for long. Though corporate earnings can periodically surge at very high growth rates from an economic trough to an economic peak, the fact remains that measured peak-to-peak across economic cycles, S&P 500 earnings growth has been well contained at a 6% annual growth rate...
...Though I'd never recommend it as an investment strategy, and it's probably more interesting to long-term investors than short-term ones in any case, it turns out that historically, the strategy of simply selling the S&P 500 at a price/peak-earnings ratio of 19.5 and sitting out of the market until the multiple hit 15 (even if it took years and years in the interim to do so) would have outperformed a buy-and-hold strategy with substantially less drawdown. Think of it this way. A modest move from 19.5 to 15 times peak earnings sops up 4.5 years of 6% annual earnings growth along the peak of the channel. Again, it's definitely not a strategy I'd actually advise – it ignores the quality of market action, and involves far, far more tracking risk than most investors could tolerate – but it does emphasize the fact that stocks generally deliver very unsatisfactory long-term returns from high starting valuations.
In order to deliver a satisfactory long-term return from current valuations and the present position of earnings, we've got to observe continued growth along the peak of the channel, and also maintain high valuation multiples indefinitely. Not just for a year, or five years, but literally as long as the stocks are held. It's worthwhile to reiterate that even S&P 500 earnings grow along the top of the channel over the next decade and the market's multiple simply touches 16 over that period (still well above the historical average multiple on both record earnings and raw trailing earnings), the total return on the S&P 500 for the coming 10 years will only be 6.17% annually. That's a disappointing return to get from such optimistic assumptions.
Full article here.
Related:
- Other US Market Blog articles that mention John Hussman
- The Market Commentary Resource Page
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