As of last week, the S&P 500 was priced
to achieve an average annual total return of just 5.83% over the coming
decade, based on our standard methodology. Prior to 1995, the lowest
implied 10-year total returns priced into the S&P 500 in post-war
November 1961: Implied 10-year total return 6.26%.
Actual 10-year subsequent return 6.16%
October 1965: Implied 10-year total return 5.89%.
Actual 10-year subsequent return 3.11%
November 1968: Implied 10-year total return 6.19%.
Actual 10-year subsequent return 2.51%
August 1987: Implied 10-year total return 6.29%.
Actual 10-year subsequent return 13.85%.
Note that in the 1987 case, the unusually strong
10-year return reflects a move to the extreme bubble valuations in the
late 1990's, which have in turn been followed by 13 years of market
returns below Treasury bill yields. Once the market becomes overvalued,
further gains are ultimately paid for by a period of sorry returns
later. To expect normal or above-average long-term returns from current
prices is to rely on the market bailing out the rich
overvaluation of today with extreme bubble valuations down the road.
Read the rest here.