From a valuation standpoint, we estimate that the S&P 500 Index would have to fall to the 1000 level to bring prospective 10 - year
nominal total returns toward their historical norm of about 10 % annually.
At longer horizons, the 6.3 % growth rate that we've assumed for nominal GDP over the coming years will begin to bail investors out given enough time, and as a result, our projection for 10 - year S&P 500
nominal total returns peeks its head up above zero, at about 2.4 % annually from current levels.
As valuations rise, prospective future returns fall, and our 12 - year projection for S&P 500
nominal total returns has now dropped to just 1.4 % annually.
We find that in market cycles across history, this new measure is better correlated (92 %) with actual subsequent S&P 500
nominal total returns than even the S&P 500 price / revenue ratio and market capitalization / nominal GDP.
We've recently emphasized that our estimates for probable S&P 500
nominal total returns have now declined below zero on every horizon of 7 years and shorter.
At current market levels, our estimate for 12 - year S&P 500 average
nominal total returns has collapsed to just 0.8 % annually.
With the S&P 500 within about 8 % of its highest level in history, with historically reliable valuation measures at obscene levels, implying near - zero 10 - 12 year S&P 500
nominal total returns; with an extended period of extreme overvalued, overbought, overbullish conditions replaced by deterioration in market internals that signal a clear shift toward risk - aversion among investors; with credit spreads on low - grade debt blowing out to multi-year highs; and with leading economic measures deteriorating rapidly, we continue to classify market conditions within the most hostile return / risk profile we identify — a classification that has been observed in only about 9 % of history.
The red line (right scale) is the average annual
nominal total return of the S&P 500 over the subsequent 12 - year period.
Actual subsequent 12 - year S&P 500
nominal total returns are plotted in red (right scale).
On that point, it's worth noting that we currently estimate a prospective 10 - year
nominal total return for the S&P 500 of just 3.9 % annually.
They also warn that because of extended zero - interest policy by the Fed, security valuations have advanced to the point where prospective
nominal total returns on a conventional portfolio mix are likely to average well below 2 % annually, with negative real returns, over the coming 12 - year period.
Historically, those interest rate and nominal growth effects have largely offset, which is why Market Cap / GVA has been reliably correlated with actual 10 - year S&P 500
nominal total returns regardless of the prevailing level of interest rates.
On the basis of
nominal total returns (including dividends), we estimate zero or negative returns for the S&P 500 on every horizon shorter than about 8 years.
On a 12 - year horizon, we project likely S&P 500
nominal total returns averaging close to zero, with the likelihood of an interim market loss on the order of 50 - 60 % over the completion of the current cycle.
We presently estimate
a nominal total return on the S&P 500 averaging 4.1 % annually over the coming decade.
On that assumption, the corresponding 10 - year projection for
nominal total returns in stocks would be -LSB-(1.0494) ^ 16 / (1.10) ^ 6] ^ (1/10)-1 = 2.0 %.
The early weeks of 2015 are the first time in history that both 10 - year Treasury yields and our estimates of prospective 10 - year
nominal total returns for the S&P 500 have both declined below 2 % annually.
The chart below shows this relationship using market capitalization to corporate gross value added (blue, on an inverted log scale) versus actual subsequent 12 - year S&P 500
nominal total returns (red).
In any event, our view is that the 10 - year
nominal total return on such conventional asset allocations is likely to be less than 2 % annually.
Based on the valuation measures most strongly correlated with actual subsequent total returns (and those correlations are near or above 90 %), we continue to estimate that the S&P 500 will achieve zero or negative
nominal total returns over horizons of 8 years or less, and only about 2 % annually over the coming decade.
Indeed, because the level of interest rates at any point in time is highly correlated with the level of nominal economic growth over the preceding decade, the relationship between starting valuations and actual subsequent S&P 500
nominal total returns is nearly independent of interest rates.
On valuation measures most strongly correlated with actual subsequent S&P 500
nominal total returns, we presently expect negative total returns for the S&P 500 on a 10 - year horizon, and total returns averaging only about 1 % annually over the coming 12 - year period (chart).
Rather, it means that investors will receive returns consistent with relatively high starting valuations —
nominal total returns for the stock market of around 5 % -6 %.
As a result, the most historically reliable valuation measures now suggest that the S&P 500 will experience a net loss over the coming decade, while including broader (if slightly less reliable) measures results in projected S&P 500 10 - year annual
nominal total returns of about 1.4 % annually (see Ockham's Razor and the Market Cycle for the arithmetic behind these estimates).
We subtract inflation from the T - note
nominal total return to get the T - note real total return.
By our own estimates, we expect
the nominal total return on the S&P 500 over the coming decade to average about 3.8 % annually, though with very broad cyclical fluctuations producing that overall result.
The next chart shows the margin - adjusted CAPE on an inverted log scale (blue), along with actual subsequent S&P 500 average annual
nominal total returns (red).
An investment in the S&P 500 Index at present levels is likely to achieve
a nominal total return of about 4.4 % annually over the coming decade, and investors will have to tolerate a great deal of volatility in pursuit of that return.
A plausible, and historically reliable estimate of 10 - year
nominal total returns here works out to only 1.06 * (15/22.7) ^ -LRB-.10)-1 +.022 = 3.9 % annually, which is roughly the same estimate that we obtain from a much more robust set of fundamental measures and methods.
Of the 9.6 percent
nominal total return earned by stocks over the past century, fully 9.5 percent has been contributed by investment return - 4.5 percent by dividend yields and 5 percent from earnings growth.
Not exact matches
The following chart shows the same data on an inverted log scale (blue line, left), along with the actual subsequent 12 - year
nominal average annual
total return of the S&P 500 Index (red line, right).
Selsick estimates the relationship between the Shiller - 16 and subsequent 16 - year
total returns in the S&P 500, and arrives at a 16 - year estimate of prospective
nominal returns of 4.94 % annually.
The average secular bull market lasted 21.2 years and produced a
total return of 17.2 percent in
nominal terms and 15.9 percent in real terms.
Here is a side by side Year 10 comparison of
NOMINAL annualized
total returns.
Plugging in the numbers from our VISVX example for
total nominal return gives us (21090 / 10000) ^ 0.1 — 1 = 0.0775 = 7.75 % (this version of the formula uses the spreadsheet symbol for exponentiation, ^, and uses the decimal form of 1⁄10).
For example, the
total return for the bond market has not only beaten the
total return for the stock market in the period, the risk - adjusted reward for investment grade bond ownership has been far greater than the risk - adjusted
nominal gains in stocks.
Lowering volatility with a balanced fund while matching the S&P 500 Year 10
total,
nominal return is quite a feat.
It shows Year 10
total NOMINAL returns.
The Morningstar Income & Dividend Investing discussion board recently included a listing of 60 years of FKINX
total (
nominal)
return data.
Implications for Required
Return Rates Investors must calculate their total required rate of return (RRR) on a nominal basis, taking into account the effect of infl
Return Rates Investors must calculate their
total required rate of
return (RRR) on a nominal basis, taking into account the effect of infl
return (RRR) on a
nominal basis, taking into account the effect of inflation.
We add the 1 % Speculative
Return to calculate the nominal long - term total return of the S&P 500 index of 10 % to
Return to calculate the
nominal long - term
total return of the S&P 500 index of 10 % to
return of the S&P 500 index of 10 % to 11 %.
The
nominal, annual required
total return can be approximated as the real required
return plus the rate of inflation.
They decompose the
total returns into the three subclasses of
return sources: changing valuation, dividend income, and
nominal dividend growth.
This is close to the long - term annualized,
nominal,
total return.
To better understand this framework, let's look at an example of a 10 - year fixed - rate US Treasury bond (historically, without default) and compare the purchase yield to the
total nominal return.4