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 %.
Not exact matches
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.
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.
Actual subsequent 12 - year S&P 500
nominal total returns are plotted
in red (right scale).
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 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.
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.
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.
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).
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.
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.
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.