Expect Dismal Returns in Stocks and Bonds

Mish

Bond  yields are low and stock PE's high so expect dismal returns in both.

Are Stocks Cheap Compared to Bonds?

The idea is ludicrous but the question came up again today in response to Charts of the Week: Valuation Inflation.

Consider this reader comment thread.

Scoot: Just to be devil's advocate, the PE on the 30 year Treasury is over 80. It's 170 for the 10 year.

Mish: Bonds have yields, not earnings. That aside, your comment is not DA at all.  Rather it is one of the silly justifications you hear all the time "stocks are cheap compared to bonds". Hussman accurately blasted the concept recently. 

Scoot: Do you have a link to what Hussman wrote? I could only find something from 2015 although I’ve no doubt it’s very similar. It might be a good topic for one of your articles.

Fundamentally Unsound

Please consider Fundamentally Unsound, John Hussman's July 2020 analysis.

If someone tells you, “well, stock valuations are high, but high valuations are justified by low interest rates,” they’re actually arguing that passive investors face the worst of all possible worlds. They’re saying “well, future stock returns are likely to be dismal, but dismal returns on stocks are justified because you’re going to get dismal returns on bonds too.”

Saying that extreme stock market valuations are “justified” by low interest rates is like saying that poking yourself in the eye is “justified” by smashing your thumb with a hammer.

Worse, by our estimates, the likely 10-year total return of the S&P 500 from current valuations is about -1.4% annually.

Over the completion of the current market cycle, I expect that the entire S&P 500 total return since 2000 will be wiped out. Specifically, I continue to expect the S&P 500 to lose about two-thirds of its value. Even a 50% market retreat would bring valuations only to levels matching the 2002 low, which was the highest valuation level ever observed at the completion of a market cycle.

Here’s the crucial point. A security is just a claim on some set of expected future cash flows. The higher the price you pay, the lower the long-term return you can expect.

Illegal Fed Actions

Hussman also discusses the illegal actions taken by the Fed in response to Covid. 

His article merits a read for many reasons.

For further discussion of valuations, please also see Charts of the Week: Valuation Inflation 

Mish

Comments (37)
No. 1-14
tokidoki
tokidoki

I think Monday could be the starting of a fireworks. Robinhood traders might be in for a lot of pain.

Realist
Realist

Investing in the stock and bond markets should be part of a well diversified portfolio. As should real estate, farmland, private equity, etc etc.

The entire point of being well diversified is precisely because NO ONE can predict the future, or where any particular “market” is going on a regular basis. And correctly guessing a market move on occasion does not mean you can keep doing it.

Tony Bennett
Tony Bennett

"Hussman also discusses the illegal actions taken by the Fed in response to Covid."

...

Skirting the law? Sure. Illegal? No.

Federal Reserve not acting as lone wolf. If it did, it would indeed be illegal.

Federal Reserve and US Treasury set up a Special Purpose Vehicle (SPV) to circumvent Federal Reserve's limitation on what it can purchase. The CARES Act provided $75 billion to Treasury for the SPV. The $75 billion in first loss position while Federal Reserve is the lender (leverage up to 10x the $75 billion).

IF losses were to occur, it would be US Treasury taking the loss and not Federal Reserve.

WC Varones
WC Varones

Hussman continues to miss the most important things.

  1. The debt & deficit cannot be sustained without devaluing the dollar.
  2. The Fed can't afford to let asset prices fall.

Yes, real returns will be crummy. But I'll take my chances with stocks, real estate, and gold over cash and bonds.

shamrock
shamrock

You can definitely expect dismal returns if you invest with John Hussman. 10 year average annual return of his "Strategic Growth fund" is -6.8%, versus an s&p500 fund of around +18%.

Casual_Observer
Casual_Observer

I actually disagree with what returns will be. Once covid is on the run the market will continue its shenanigans. Market prices have little to do with reality and more to do with computers at the Fed intervening in bond markets which affects how money moves in stocks as well. Also there is more trading then investing going on. These trade algorithms can sell on a moment's notice and buy too. This is why you never see big down days anymore. The Fed can also halt trading and intervene if there is a big down day.

channelstuffing
channelstuffing

Since 09 stocks and bonds might be (is) the biggest scam in history,the Fed has become the Roselli Brothers of WS,enriching the likes of there masters Buffet and Bezos (B&B)to the tune of trillions while the economy rots to where virtually everything is bankrupt,headed for bankrupcy,dependent on big govt for a check,and this after "longest expansion in US history"LMMFAO!

AWC
AWC

Invest in stocks vs. bonds vs commodities vs property vs coffee in Afghanistan?

Why does no one mention investing in oneself? As a one horse operator, sole proprietor, find a need and fill it kind of guy, since the early 1970’s, I’ve generally learned to trust my own way of doing business, over trusting the methods of unknown entities. Besides, it’s just too time consuming to separate the assorted snake oil salesmen and confidence men from the “legit.”

Granted, there are some pros and cons that come with the independence of small scale entrepreneurship. Leaving a happy customer at the end of a project in itself is as rewarding as monetary compensation, if not more so.

And when one miscalculates, and needs to reach into one’s pockets to cover the error, the blame can only be pointed into a mirror. I’ve always looked at that scenario as “Tuition,” anyway, and usually cheaper than Ivy League book learnin’.

Recognizing the old adage that “Your expenses tend to rise to meet your income,” it has always seemed to me that it’s best to strike a balance there. Greed is no more comforting an emotion than fear.

When one has “enough” to gain some offing from the wolf at the door, why not take some time to “Stop and smell the roses,” or the home grown basil in the caprese?

Also keeping in mind the fact that a touch of deferred gratification is prudent along the way. I recall an incident in Hillsboro, CA (Not exactly a blue collar community) back around 1999, I won the bid on a small construction project at a “modest“ $3 million 3/2 ranch dingbat house. Hadn’t expected to get the job, so I was between trucks at the time. Had to grab the first thing I could find, a 1970 GM pickup.

The “lady” of the house met me in the driveway, and asked if I could park in the back, because she didn’t want the neighbors see such an old “clunker in her driveway. Damn, I didn’t think I was entering a car show? Told her I could go get a new one, but would need to add to the bid. Nothing but crickets the duration of the project ;-)

ps. That job led to several referrals!

Scooot
Scooot

Thanks for the post & link Mish. I don’t think many decisions to buy anything recently have been based on their yields or long term returns, it’s mostly been either risk off or following the crowd for short term price gains. Balanced & diversified portfolios that are managed in return for fees are & will become more challenging as fees begin to take a greater percentage of these returns.

anoop
anoop

my advice -- do not fight the fed. this is going to be the best bull run until the next crisis. i think nasdaq tops out at 30k by the end of 2021, drops to 27k during the next crises. then heads to 100k, drops to 90k, etc. even if there is inflation, they will let it happen. inflation in the usa is different from inflation in zimbabwe or weimar germany because usd is a reserve currency. fwiw, i don't think there will be inflation as long as all the goods that are part of the cpi come from china.

magoomba
magoomba

Inflation IS depression.

Augustthegreat
Augustthegreat

If the world is indeed getting into deep deflation, the US treasury yield will also become negative, like german and Japanese longterm bonds, which would be equivalent to a P/E of infinity (positive or negative). This would in turn mean that stock markets would go much much Higher!

Captain Ahab
Captain Ahab

Currently, the Fed 'guarantees' low yield, and theoretically reduces/eliminates risk--blowing an ever bigger bubble. At such low yields, the present value impact of a slight change in yield (interest rate etc) is significant. Do the math. Go from a discount rate of 9% to 8% on a cash flow stream, then, from 0.5% to 0.4%.
Hidden in a low-yield environment is a ticking time bomb. A rate bump will savage prices.
Crashing prices will induce a risk premium, increasing yields... Now, we have a cobweb loop. Hard to control. Implosion is possible. With central banks already stretched, I don't fancy the chances.

CCR
CCR

I stopped measuring my returns against the S&P or nazzy in 2001. I measure my returns against my own performance from yesterday, last month and last year. Adapt to the conditions. Modern day volatility has allowed for outsized returns. Take advantage of this gift.


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