There has been a large gap between my most recent posts. It’s been hard to keep writing the same thing over and over again, and to watch the market continue to go higher. I have not given in and bought into this market, though. I am still going to keep that patience because the higher this goes without any substantial increase in fundamentals, the more I know that things will revert back and revert back in a strong way.
I recently purchased a Bloomberg machine which allows me to backtest stock strategies over the past 21 years. That’s annoying, however, considering I would want to backtest going back 40-50 years, to see how my strategies would have faired during secular bull and bear markets. Now…with that in mind, going back 21 years, the stock market total return has been about 9.5% per year which is actually lower than the 100+ year historical average of 9.9%.
Since September 18th, we have had a nice pull back on the S&P 500 and I love seeing the pundits on TV talking about how this is a great buying opportunity. Of course it is…if you want to ignore all fundamentals and historical valuation metrics that have proven to be accurate. Market Cap to GDP ratio, which Warren Buffett describes as probably the single most accurate stock market valuation metric at any given time, is at levels that have only been rivaled by late 1999 and early 2000. Based on these metrics, the 10 year outlook on the S&P 500, including dividends, we are near 0% returns, annualized, per year for the next 10 years. That’s awful. Historically, the market should be making 10% per year, so to get to that kind of valuation, the market has to drop in half to get the expected 10% per year annualized return. It sounds unreasonable? Ok. The same thing was said after the mid 1970s cyclical bull market.