With the year winding down, equity strategists are busy putting out their outlook for the next year. In a recent article David Wilson, of Bloomberg, featured a report from Binky Chadha, Deutsche Bank’s chief US equity strategist which seemed familiar.
Chadha pointed out that the 10 year rolling return of the S&P 500 index is now in one of those historically rare troughs. And based on this, suggested that the next 10 to 15 years will be very good for stocks.
Long time readers may remember highlighting this amid the darkest days of the 2008 bear market: Why Long Term Investors Should Consider Buying and again in March 2009, just as the bull market was starting: Revisiting the Long Term Bullish Case for Stocks.
Here is an updated chart from early 1900’s to now:
Source: Data from Prof. Shiller
It is important to note that the data is based on ex-dividend S&P 500 index levels and that dividends provide a significant boos to total returns. But since we are also ignoring transaction costs and taxes, let’s pretend that the difference is small.
In any case, the chart can be interpreted in differing ways depending on your personal bias. If you’re bullish, it is indicative of blue skies and a forecast of a similar run up to 280-300% returns within the next decade.
If you’re bearish on the other hand, it confirms just how bad things are. After all, previous intervals of history that shared similar negative returns are infamous to any trader: 1932, 1939 and 1975. Those were grueling bear markets that devastated portfolios and made mincemeat of the majority of investors who tried to time the ensuing markets.
Personally, I’m agnostic. I used this chart originally to offer a calming (very) long term perspective. A bear market can be very painful emotionally and it is easy to get caught up in the fear and loathing. So hopefully the previous two times that I wrote about this helped some people to come to grips with the fact that the world was not, in fact, ending.
This therefore, is more useful in pointing out that the worst is over, rather than being a predictor of better times ahead. According to the 18 year commodity/stock market cycle we still have about 6 years left to go.
That is, if we assume that the huge base that is being built by the major indexes going sideways won’t be over for the typical 17.6 years and if we assume that it started at the 1999 bubble top. As I outlined yesterday, the current bull market is healthy and will probably continue. But it is a cyclical one. A secular bull market of the kind that propelled stocks like a rocket from 1982 to 1999 isn’t around the corner.
That’s why I don’t agree with Chadha’s forecast for the S&P 500 index to close at 1550 by the end of 2011. This, by the way, is the highest forecast by at least 100 points. Chadha also had a very bullish bias for 2010, estimating that the S&P 500 index would finish this year at 1325 (or 7.3% higher than today’s close).