Monday 26 March 2012

Sobering Views of Future US Stock Returns

Those thinking "phew! thank goodness stock markets have returned to normal and happy days are with us again" may want to read John Hussman's A False Sense of Security on the Hussman Funds website and James Montier's What Goes Up Must Come Down on Both articles just published in March 2012 make a compelling argument that US stocks are richly valued since corporate earnings are artificially (government stimulus) and unusually high, distorting the P/E ratio and prospective returns.

Hussman's bottom line: "... we project total returns for the S&P 500 of just over 4% annually over the coming decade"

Montier's: forecast annual real total return for the S&P 500 over the next seven years of only 0.4% (see Exhibit 2 in his article)

That is woefully weak compared to the long term historical annual average of 6.2% for US stock returns documented in Dimson, Staunton, and Marsh's Credit Suisse Global Investment Returns Yearbook 2012.

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