, 14 tweets, 5 min read Read on Twitter
1/ Oh, no, no, no. Here's what people overlook about buybacks when they add them to dividends. The 3.7% SPX revenue growth in recent decades is index-level and already fully captures the impact of buybacks (via the SPX divisor). Adding buyback "yield" is sheer double-counting.
2/ Given that structural real GDP growth, absent endless further declines in the unemployment rate, is now down to 1.6%, the expectation of roughly 3.7% nominal growth remains about right for revenues, and also for earnings, unless record profit margins were to expand forever...
3/ So now you've got roughly 3.7% nominal growth, plus a dividend yield of about 2%, which yes, does give you an expected return of about 5.7%, but then, that's only if valuations - particularly objects that behave like the price/revenue multiples, never, ever retreat...
4/ Note that these valuation measures are far better correlated with subsequent market returns, easily bettering price/forward op earnings & the Fed Model. Why? Cause stocks aren't claims to next year's earnings. Your fundamental has to be representative of decades of cash-flows.
5/ Indeed, one of the acid-tests of a useful valuation measure is whether it produces valuations essentially proportional to the long-term discounted stream of actual cash flows delivered to investors over time, so that changes in valuation imply variations in expected returns.
6/ Presently, the most reliable valuation measures we identify are ~ 2.6x the historical norms we associate with average subsequent market returns. In 07-09, those norms were slightly breached. The 00-02 decline got within ~25% (the highest valuation for a bear low on record).
7/ So now some unpleasant arithmetic. 1/2.6 - 1 = -62%, which is roughly the decline that one would expect if the completion of this cycle draws reliable valuation measures to their long-term norms (and not below). That's not a worst-case scenario, just a run-of-the-mill outcome.
8/ Moreover, despite the notion that "it always comes back" - which is always popular when the market is near hypervalued record highs, let's do a little bit of long-term return arithmetic. Assume growth bumps up to 4% annually, with valuations now 2.6 x norm, and dividend 2%...
9/ First, assume that reliable valuation measures merely touch their historical norms (which they've breached in most cycles except 2000-2002). If that happens 10 years from now, the annual SPX total return estimate would be (1.04)(1/2.6)^(1/10)+.02-1 = -3.5% annually...
10/ What about a 20-year horizon? In that case, you've got an estimated annual SPX total return of (1.04)(1/2.6)^(1/20)+.02-1 = 1.1%. So despite very low Treasury bond yields, stocks are still likely to lag bonds over that horizon...
11/ Now, it may seem preposterous that stocks could possibly lag T-bills over a horizon of well over a decade, but unfortunately, even a return to normal 6% peak-to-peak growth rates would have a difficult time overcoming any valuation drag: (1.06)(1/2.6)^(1/20)+.02-1= just 3.1%.
12/ … and see, that return to durable valuation norms is why stocks gave up the entire benefit of two successive bubbles and ultimately lagged T-bills for the entire period between 1995 and 2009. That's forgettable only because we're at the peak of a third valuation bubble.
13/ So yes, if valuations are near durable valuation norms, it's appropriate to estimate long-term equity market returns by adding expected growth to the dividend yield. But if you're using per-share values, buybacks are already embedded in the growth rate. You can't count twice.
14/ But if valuations are nowhere near durable valuation norms, nearly all of the excess is routinely wiped away over time. Those transient returns are driven by shorter-term swings investor psychology toward speculation or risk-aversion (see "internals" in other threads).
Missing some Tweet in this thread?
You can try to force a refresh.

Like this thread? Get email updates or save it to PDF!

Subscribe to John P. Hussman
Profile picture

Get real-time email alerts when new unrolls are available from this author!

This content may be removed anytime!

Twitter may remove this content at anytime, convert it as a PDF, save and print for later use!

Try unrolling a thread yourself!

how to unroll video

1) Follow Thread Reader App on Twitter so you can easily mention us!

2) Go to a Twitter thread (series of Tweets by the same owner) and mention us with a keyword "unroll" @threadreaderapp unroll

You can practice here first or read more on our help page!

Follow Us on Twitter!

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just three indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3.00/month or $30.00/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!