Hussman: Economic Measures Continue to Slow

John Hussman’s latest weekly market comment is, as always,  a must read. The entire comment can be found here but I will share a few of my favorite quotes (emphasis is mine):

Still, with the S&P 500 at a Shiller P/E over 21, and our own measures indicating an estimated 10-year total return for the S&P 500 in the low 5% area, it is clear that investors have priced in a much more robust recovery than we are likely to observe. Our long-term total return estimates are consistent the historical norms based on Shiller P/Es – since 1940, Shiller P/E values above 21 have been associated with annual total returns for the S&P 500 averaging 5.3% over the following 7 years and 4.9% annually over the following decade.

In contrast, high dividend payouts (as a ratio of forward operating earnings) typically reflect temporarily depressed operating earnings, and short-term margin compression. Accordingly, elevated payouts tend to be followed by above average growth in operating earnings over the following decade. The tendency for dividend payouts to lead operating earnings growth is depicted below (see Long Term Evidence on the Fed Model and Forward Operating P/E Ratios for details on forward operating earnings prior to 1979). Suffice it to say that the low level of payouts today most likely reflects elevated and unsustainable operating margins.

To some extent, I view current market conditions as something of a “Ponzi game” in that valuations appear neither sustainable nor likely to produce acceptably high long-term returns, and speculators increasingly rely on finding a greater fool.

Hussman’s entire market comment is well worth reading.

Source:  hussmanfunds.com

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