The reality of present financial asset valuations is brilliantly encapsulated by John Hussman this week. QE interventions have brought forward asset appreciation from the next 10 years and spent it over the past 5 in order to quickly make back 2008 losses. Those banking on gains from here, have misunderstood the deal. See: Why stocks are not ‘cheap relative to bonds’.
The S&P 500 has seen negative 10-year prospective returns before (as we correctly projected in real-time at the 2000 peak, based on similar arithmetic, even allowing for optimistic assumptions). What we haven’t seen at any point in history is the combination of dismal projected returns for the S&P 500 coupled with a similarly dismal yield-to-maturity on bonds. The coming decade will be an underfunding disaster for corporate pension plans, endowments, and municipalities, most that still typically plan around an assumed rate of return closer to 8%.
The most reliable measures we identify suggest that nominal total returns on a conventional asset mix are likely to be closer to 1% annually. Quantitative easing has already given investors, at least on paper, the gains that they would otherwise have waited years longer to achieve (again, at least on paper). Particularly in equities, investors who do not have a very long horizon and cannot actually tolerate a 50% loss should consider realizing those paper gains now and cutting exposure to a tolerable level. That’s not market timing – it’s sound financial planning that may be quite overdue.