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 red line (right scale) is the average annual
nominal total return of the S&P 500 over the subsequent 12 - year period.
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.
Not exact matches
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.
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.
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).
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.
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.
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.
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.
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 %.
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).
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.
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.
They decompose the
total returns into the three subclasses
of return sources: changing valuation, dividend income, and
nominal dividend growth.
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.
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