Money and Finance
- Hussman Weekly Market Comment: Declaring Victory At Halftime
Last week, the S&P 500 came within 1% of reprising a syndrome that we’ve characterized as a Who’s Who of Awful Times to Invest, featuring a Shiller P/E over 18 (S&P 500 divided by the 10-year average of inflation-adjusted earnings), the S&P...
- Vanguard: Forecasting Stock Returns: What Signals Matter, And What Do They Say Now?
Found via The Idea Farm. Executive summary. Some say the long-run outlook for US stocks is poor (even ‘dead’) given the backdrop of muted economic growth, already-high profit margins, elevated government debt levels, and low interest rates. Others...
- Hussman Weekly Market Comment: Whack-a-mole
As of last week, the S&P 500 has declined to the point where we now expect 10-year total returns averaging about 5.7% annually on the index. This is certainly higher than the 3.4% prospective return we observed earlier this year, but is still a prospective...
- Hussman Weekly Market Comment:
Last week, I had the pleasure of speaking to investors at the Ibbotson-Morningstar 2011 investment conference. Since I rarely travel outside of charitable work, it was a nice opportunity to talk with shareholders and other investors. The topic was "Useful...
- Hussman Weekly Market Comment From May 21, 2007: How Much Do Interest Rates Affect The Fair Value Of Stocks?
In recent months, I've used a wide variety of analytical methods (discounted cash flows, normalized earnings, price/peak earnings calculations, etc) to show that stocks are currently priced to deliver unusually poor long-term returns – stated simply,...
Money and Finance
The Flaws in the Fed Model
Found via The Big Picture.
There are perfectly reasonable arguments that can support an upbeat outlook on the stock market. Unfortunately for crafters and consumers of sound bites, one of the simplest and most popular bullish assertions is irrelevant.
This is the common, intuitive, yet specious claim that because yields on 10-year Treasury notes are near record lows at 1.64%, stocks are so flattered into appearing cheap by comparison that surely they must rise. The only way to watch an hour of financial television without hearing that one is to hit the mute button.
The idea here, once formalized as the "Fed Model," is that stocks' "earnings yield" (reported or forecast operating earnings for the S&P 500, divided by the index level) should tend to track the Treasury yield in some fashion. With this earnings yield now above 7%, based on a trailing price-to-earnings ratio near 13, this model and its various offshoots render equities a no-brainer buy. Or, if one prefers, that Treasuries are in a reason-defying bubble.
This simply doesn't hold up in theory or practice. The Fed Model only "worked" as a predictor of market action in the 1980s and '90s, when bond yields were steadily descending and stock values consistently rising as inflation and interest rates were slowly strangled. Both before that period and since, the Fed Model relationship has been mostly a non sequitur in terms of foretelling market performance.
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Related previous post: Fight the Fed Model: The Relationship Between Stock Market Yields, Bond Market Yields, and Future Returns - By Cliff Asness (December 2002)
- Hussman Weekly Market Comment: Declaring Victory At Halftime
Last week, the S&P 500 came within 1% of reprising a syndrome that we’ve characterized as a Who’s Who of Awful Times to Invest, featuring a Shiller P/E over 18 (S&P 500 divided by the 10-year average of inflation-adjusted earnings), the S&P...
- Vanguard: Forecasting Stock Returns: What Signals Matter, And What Do They Say Now?
Found via The Idea Farm. Executive summary. Some say the long-run outlook for US stocks is poor (even ‘dead’) given the backdrop of muted economic growth, already-high profit margins, elevated government debt levels, and low interest rates. Others...
- Hussman Weekly Market Comment: Whack-a-mole
As of last week, the S&P 500 has declined to the point where we now expect 10-year total returns averaging about 5.7% annually on the index. This is certainly higher than the 3.4% prospective return we observed earlier this year, but is still a prospective...
- Hussman Weekly Market Comment:
Last week, I had the pleasure of speaking to investors at the Ibbotson-Morningstar 2011 investment conference. Since I rarely travel outside of charitable work, it was a nice opportunity to talk with shareholders and other investors. The topic was "Useful...
- Hussman Weekly Market Comment From May 21, 2007: How Much Do Interest Rates Affect The Fair Value Of Stocks?
In recent months, I've used a wide variety of analytical methods (discounted cash flows, normalized earnings, price/peak earnings calculations, etc) to show that stocks are currently priced to deliver unusually poor long-term returns – stated simply,...