Related book: Thinking, Fast and SlowChris Pavese's idea presentation on SeaWorld Entertainment (video) (LINK)
Related book: Walt's Revolution!: By the NumbersAmazon's Hollywood Shopping Cart Secrets (LINK)
Richard Branson's Billionaire Paradise (Documentary about Necker Island) (video) (LINK)
Hussman Weekly Market Comment: Two-Tier Markets, Full-Cycle Investing, and the Benefits and Costs of Defense (LINK)
As a reminder of where the market stands at the moment, the chart below shows the ratio of nonfinancial market capitalization to corporate gross value added. While other historically reliable metrics carry a very similar message, Market Cap/GVA has the highest correlation with actual subsequent 10-year S&P 500 total returns than any other valuation ratio we’ve examined across history. Despite my admitted stumble in the half-cycle since 2009, it’s perplexing that the equity market is at the second greatest valuation extreme in the history of the United States, on what are objectively the most durably reliable valuation measures available, but it has somehow become an affront to suggest that this will not end well.
Notice that no market cycle in history, even in recent decades, has failed to carry the ratio of MarketCap/GVA to 1.0 or below by the completion of the cycle. The S&P 500 is presently twice that level. We allow that short-term interest rates may be pegged well below historical norms for several more years, and we know that for every year that short-term interest rates are held at zero (rather than a historically normal level of 4%), one can “justify” equity valuations about 4% above historical norms – a premium that removes that same 4% from prospective future stock returns. So assuming historically normal long-term nominal growth in the economy and corporate revenues, coupled with suppressed interest rates, we accept that another 5 years of zero interest rates might “justify” a premium to historically normal valuations of about (5 years x 4% =) 20%. Again, the problem is that market valuations are presently more than double those norms on the most historically reliable measures.
...Presently, we anticipate negative total returns for the S&P 500 Index over the coming decade. Even if valuations remain above historical norms a decade from today, it will be extremely difficult for stocks to post total returns beyond the low single digits in the coming 10-year period.