Diminishing Equity Index Returns

by: Michael Harris


High valuations have negative impact on medium-term returns.

Massive central bank interventions have failed to boost equity returns.

Ten-year returns in S&P 500 and Nasdaq remain range bound below longer-term averages.

Despite new all-time highs and a rally in technology stocks, S&P 500 (NYSEARCA:SPY) and NASDAQ 10-year rolling returns remain below their longer-term averages. In fact, in the last four years, the 10-year rolling return is range bound in spite of interventions by central banks.

I was bullish on stocks during the 2010 and 2011 corrections although some analysts who are now bullish were expecting then a return to 2009 lows. Their main mistake is that the massive interventions by central banks after 2013 have invalidated most of technical indicators, if not all, turning them to noise. At the same time, fundamental analysis has little predictive power in markets driven by central banks.

In my previous SA article, I presented a few examples of diminishing returns in popular stocks. I showed that despite high valuations and explosive uptrends, rolling 10-year returns are decreasing.

In this article, I show how in the last four years and despite new all-time highs from the rally in technology stocks, the 10-year rolling return has remained range bound and well below its longer-term average in both S&P 500 and NASDAQ. Note that the analysis does not include dividends.

S&P 500

The rolling 10-year return has remained well below 107%, which is the average since 1960. In the last four years since 2013, the 10-year return has fluctuated between 50% and 80%. These levels are nowhere close to 1990's levels or even levels achieved during the 2000's uptrend. This is despite central bank intervention and new all-time highs.

If the return period is shortened, the picture improves, but not fundamentally. Below is the same S&P 500 monthly chart with the rolling 5-year return.

Obviously, central bank interventions benefited investors with a shorter-term horizon. But it may be seen that despite recent all-time highs in the index, the 5-year return is nearly half of where it was in the beginning of 2014. Of course, the return is nowhere near levels achieved even before the 1987 crash or 2000 top.


The situation in NASDAQ is a little worse due to the right tail event, known as dot-com bubble, and subsequent left tail event, known as dot-com bust. The rolling 10-year return in the last 15 years has stayed below its longer-term average of about 190 since 1971. In the last four years, the 10-year return is range bound between 100% and 160%. This is nowhere close to 10-year returns realized in the mid-1980s. (Note that longer-term averages of distributions with fat tails and high kurtosis are not very meaningful, but we are using them here in a descriptive sense.)

A 5-year return does not change the above picture in a fundamental way.

Despite the recent rally and new-all time highs, the 5-year return is about half of where it was in early 2014.

The above facts suggest that for equity markets to maintain attractive reruns as in the past, they must rise even higher and with a steeper slope. This further translates to more intervention by central banks or massive reallocation from other sectors, for example, fixed income. But yields will have to become negative for a significant outflow from fixed income to equities. This has already happened in Europe and provided support to local equity markets. It further appears that monetary policies have reached limitations in juggling variables of stochastic non-linear financial systems for modulating asset prices. They should have avoided this in the first place.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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