If stock market returns have been good in the past, will they be good in the future? Listen to the financial industry and you'd think it was a given. But it isn't.
The value of a stock is, as John Bogle points out in today's FT, represented by one thing only: the discounted value of its future cash flow. You pay a price for it now in the expectation that the dividends you will get in the future will make the price make sense.
It isn't a precise science (obviously) but you can't get away from the fact that markets have intrinsic values. Now "prices can rise far above their intrinsic values and far below but the pendulum eventually focuses on fair value". The point is that, when you look at markets, the one thing you really have to look at the only thing that is really important - is price. Everything else is noise.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Bogle looks at the dividend yield in his attempt to see where the value is. Over the past century he says the US has returned nominal returns of around 9% (so before tax, charges and inflation). Half of that has come from capital growth and half from dividends. But today the dividend yield in the US is more like 2% than 4.5% (less than that in Japan...).
So if you expect to get the same kind of return as in the past, you need to think that real capital growth from here on will be higher than it ever has been in the past. I can't buy that one. Why? Cyclically adjusted p/e. Right now it is knocking around 24 times. In the many years from the late 1800s to 1997 it was at that level for a grand total of 24 months. Since then it has been there most of the time.
You might think that makes some kind of sense given the low interest rate environment we have seen for the past few decades. Perhaps it does. But it also isn't likely to be sustainable. Overpriced markets are being held up by a mixture of blind hope and quantitative easing. The first is fragile and the second very much at risk: note that while the Fed is allowing itself the option of QE3, it is not a given that it will go ahead.
CLSA's Russell Napier who was briefly bullish on equities into the beginning of the year has recently put out a note suggesting that investors sell their US equity holdings. You can see why.
-
House prices to crash? Your house may still be making you money, but not for much longerOpinion If you’re relying on your property to fund your pension, you may have to think again. But, says Merryn Somerset Webb, if house prices start to fall there may be a silver lining.
-
Prepare your portfolio for recessionOpinion A recession is looking increasingly likely. Add in a bear market and soaring inflation, and things are going to get very complicated for investors, says Merryn Somerset Webb.
-
Investing for income? Here are six investment trusts to buy nowOpinion For many savers and investors, income is getting hard to find. But it's not impossible to find, says Merryn Somerset Webb. Here, she picks six investment trusts that are currently yielding more than 4%.
-
Stories are great – but investors should stick to realityOpinion Everybody loves a story – and investors are no exception. But it’s easy to get carried away, says Merryn Somerset Webb, and forget the underlying truth of the market.
-
Everything is collapsing at once – here’s what to do about itOpinion Equity and bond markets are crashing, while inflation destroys the value of cash. Merryn Somerset Webb looks at where investors can turn to protect their wealth.
-
Value is starting to emerge in the marketsOpinion If you are looking for long-term value in the markets, some is beginning to emerge, says Merryn Somerset Webb. Indeed, you may soon be able to buy traditionally expensive growth stocks on the cheap, too.
-
ESG investing could end up being a classic mistakeOpinion ESG investing has been embraced with enormous speed and zeal. But think long and hard before buying in, says Merryn Somerset Webb.
-
UK house prices will fall – but not for a few yearsOpinion UK house prices look out of reach for many. But the truth is that British property is surprisingly affordable, says Merryn Somerset Webb. Prices will fall at some point – but not yet.
