John Hussman of www.HussmanFunds.com does a great job taking data and showing us projected returns over time. He now shows charts going back to 1926 (see below) showing the projected and actual 12 year returns of the stock market based on some slight variation of market cap to GDP ratio. See the image below and also on his website (http://hussmanfunds.com/wmc/wmc160523.htm)
As you can see, there is quite the correlation between projected returns (blue line) and actual returns (red line) going back 90 years. These returns INCLUDE dividends and as you can see, right now, we are at less than 2% total returns over the next 12 years INCLUDING dividends. Dividends are currently above 2% so that means that 12 years from now, the nominal level of the S&P 500 should be LOWER than it is today.
As you can see, there is a pretty obvious negative correlation between Market Cap to GDP and the total subsequent 12 year returns.
The interesting part, though, is what has been aggravating. As much as I show people the first chart, everyone says “yeah but this time could be different.” Yes, it could. I do not deny that at all. However, look at the outliers. There aren’t any CRAZY outliers. Are there fluctuations? Absolutely, but there are no 10% returns where there are a cluster of 0% returns and to the same token, when the actual returns were large (15% to 20%) you don’t see a random occurrence of 0% returns. It shows that these results are pretty much in tune with what is expected.
I had an accountant in my office two weeks ago telling me that there has never been a 10 year period in which stocks didn’t go up at least 10%. First off, he is MASSIVELY off, but second, I asked him if he then thought that 10 years from now he thought that the S&P would be at 4500 and he said “No, probably 3500.” Which contradicted what he said about the 10 year returns never being below 10%, but also, this scatterplot shows that when the projection is as bad as it is now, we are NOT going to see a very large return compared to what was expected.
I get it…it’s data and everyone thinks all data can be manipulated to show you what you want to see. I agree with that…to a certain level. Definitely not here.