Monday, 28 November 2016

S&P 500 at record high but prospective returns over the long term look “paltry”

US stocks ended at a record high last week.

The S&P 500 rose 1.4 percent over the week to end at a record high of 2,213.33. The index has now risen for three consecutive weeks.

However, Wayne Kaufman, chief market analyst at Phoenix Financial Services, said that the following week “could see some softness”.

“The three indicators I look at—market breadth, sentiment, and valuation—are all in areas where the market typically runs into some headwinds,” Kaufman said. “Investors are hopeful that valuations are justified given the incoming administration.”

However, John Coumarianos thinks that US stock valuations are suggesting that returns over the next decade are likely to be “paltry”.

“A 5% real annualized return from the S&P 500 may not be impossible, but it’s highly improbable from the market’s current Shiller valuation of 26,” he wrote. “The long term average is 16.”

Coumarianos wrote that Research Affiliates has projected future 10-year annualised real returns for the S&P 500 and the Barclays US Aggregate at 1.1 percent and 0.50 percent respectively.

John Hussman also has low expectations for US stock returns. In his latest article, Hussman wrote that the US stock market is “at a level consistent with expectations of S&P 500 12-year nominal total returns averaging less than 1% annually.”

Hussman thinks that the recent marginal highs are more consistent with a “blowoff” than a “breakout” and expects “the S&P 500 to surrender its entire total return since 2000 over the completion of the current market cycle”.

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