Portfolio returns can only come from three sources: Bond yields, stock dividends, and stock growth. There is no fourth mystery ingredient “X.”
These days, thanks to Federal Reserve gerrymandering of the bond market and the boom on Wall Street, two of those three elements offer pitiful returns. Ten-year bonds sport a yield, or interest rate, of 2.7%. Stocks yield just 2%, well below historic averages.
To reach an overall portfolio return of about 8% a year from here, the third element of the return, stock growth, needs to come through in spectacular style. Mathematically, to reach their goals, investors will need the stock market to rise about 9% a year in value, every year for the next decade.
For that to take place, the Dow will have to hit 36,000 in about 10 years’ time.
For an alternative view of what investors are likely to earn, check in with John Hussman, manager of the Hussman Funds and among the few people to predict the 2007 crisis. In his latest open letter to investors, he warns that we are heading for a third monumental crash of about 40%, and that by certain measures the stock market is now about as overvalued as it was in 1929.
“[T]he deepest market losses in history have always emerged from an identical set of conditions (also evident at the pre-crash peaks of 1929, 1972, and 1987),” he writes, “namely, an extreme syndrome of overvalued, overbought, overbullish conditions, generally in the context of rising long-term interest rates.” And that, he adds, is what we have now.
I might add that there is one more deeply bearish sign: Mom and Pop investors have returned to the market, and have been buying stocks since the start of the year. History says their timing is absolutely terrible.
The return of ‘Dow 36,000’ – Brett Arends’s ROI – MarketWatch.
Dow 36.000 in 10 ani? sau 9300 (=-40%) in cateva luni?