the past 13 years have chronicled the journey of valuations – from hypervaluation to levels that still exceed every pre-bubble precedent other than a few weeks in 1929. If by 2023, stock valuations complete this journey not by moving to undervaluation, but simply by touching pre-bubble norms, we estimate that the S&P 500 will have achieved a nominal total return of only about 2.6% annually between now and then.
He uses the Shiller P/E ratio as his measure of over- or under-valuation. Thanks to Timothy Taylor for the pointer.
What I found even more interesting was a paragraph later in Hussman’s essay.
On careful analysis, however, the clearest and most immediate event that ended the banking crisis was not monetary policy, but the abandonment of mark-to-market accounting by the Financial Accounting Standards Board on March 16, 2009, in response to Congressional pressure by the House Committee on Financial Services on March 12, 2009. The change to the accounting rule FAS 157 removed the risk of widespread bank insolvency by eliminating the need for banks to make their losses transparent. No mark-to-market losses, no need for added capital, no need for regulatory intervention, recievership, or even bailouts. Misattributing the recovery to monetary policy has contributed to a faith in its effectiveness that cannot even withstand scrutiny of the 2000-2002 and 2007-2009 recessions, and the accompanying market plunges. This faith is already wavering, but the loss of this faith will be one of the most painful aspects of the completion of the present market cycle.
And I cannot resist the subsequent paragraph:
The simple fact is that the belief in direct, reliable links between monetary policy and the economy – and even with the stock market – is contrary to the lessons from a century of history. Among the many things that are demonstrably not true – and can be demonstrated to be untrue even with simple scatterplots – are the notions that inflation and unemployment are negatively related over time (the actual correlation is close to zero and slightly positive), that higher inflation results in lower subsequent unemployment (the actual correlation is positive), that higher monetary growth results in subsequent employment gains (the correlation is almost exactly zero), and a wide range of similarly popular variants. Even “expectations augmented” variants turn out to be useless. Examining historical evidence would be a useful exercise for Econ 101 students, who gain an unrealistic sense of cause and effect as the result of studying diagrams instead of data.
To which I would say, not all times are equal.
From the beginning of the industrial returns have been falling.
nominal total return of only about 2.6% annually between now and then.
The Vangard total market fund is paying about 2% so if the market would need to only rise .6% per year. Maybe, we will see, still it beats the current yield on Government bonds.