Hussman Weekly Market Comment: It Is Informed Optimism To Wait For The Rain
Based on valuation metrics that have demonstrated a near-90%
correlation with subsequent 10-year S&P 500 total returns, not only
historically but also in recent decades, we estimate that U.S. equities are
more than 100% above the level that would be associated with historically
normal future returns. We presently estimate 10-year nominal total returns for
the S&P 500 averaging just 2.2% annually
over the coming decade, with zero or negative nominal total returns on every
horizon of less than 7 years. Regardless of very short-term market direction,
it is urgent for investors to understand where the equity markets are
positioned in the context of the full cycle.
Importantly, this expectation fully embeds projected nominal
GDP growth averaging over 6% annually over the coming decade. To the extent
that nominal economic growth persistently falls short of that level, we would
expect U.S. stock market returns to fall short of 2.2% nominal total returns
(including dividends) over this period. These are not welcome views, but they
are evidence-based, and the associated metrics have dramatically higher
historical correlation with actual subsequent returns than a variety of
alternative approaches such as the “Fed Model” or various “equity risk premium”
models. We implore investors (as well as FOMC officials) to examine and compare
these historical relationships. It is not difficult – only uncomfortable.
