Markets: News  

By Mark Hulbert

My monthly review of stock market valuation indicators

The stock market over the next decade will barely keep up with inflation.

That's according to an average of the 10-year projections of the eight valuation indicators I highlight in this space every month. I focus on these eight because they have better track records than any others of which I am aware. To be more precise, on average they are projecting a total return between now and 2033 of minus 0.1% annualized.

This projection raises the prospect of a market that remains relatively flat in inflation-adjusted terms for many years on end--neither Heave nor Hell, if you will, but Purgatory. Navigating such an environment will require a big adjustment in our thinking, since we are used to viewing the markets in binary terms--we're either in a bull or a bear market. But what if we're in neither?

These projections could also require a big adjustment in our strategies. The ones we're more used to, which are designed to make money during major bull or bear markets, usually perform poorly in a low-return, low-volatility environment. That's because many of them suffer from time decay, which means that they can lose money even if the market eventually moves in the anticipated direction--if it takes too long for it to do so.

At least we're not in Hell

If the future looks like Purgatory, we can perhaps get some solace from not being in the Hell that we faced last year. At the beginning of 2022, my eight valuation indicators were, on average, projecting a ten-year inflation-adjusted return of minus 3.8% annualized. That translates into losing a third of your purchasing power in a decade.

Moving from Hell to Purgatory is a big deal, at least if you're inclined to see the glass as half full rather than half empty. In just 12 months, the stock market has suffered what at the beginning of 2022 was projected to be a decade's worth of losses. As a result, we now face the relatively better prospect of holding our own against inflation for a decade.

To be sure, just because the stock market in a decade's time may be neither higher nor lower than where it is today, we don't know the path the market may take to get there. Instead of grinding away, year after year, neither gaining nor losing more than a few percent, it's possible that the market undergoes a powerful rally followed by an equally powerful decline--or vice versa. But if the valuation models are accurate, we will be ultimately frustrated regardless.

It's because of considerations such as these that long-term bear Jeremy Grantham, co-founder of Boston-based GMO, recently declared that the "easiest leg" of the bursting of the stock market's bubble is now over. A "large chunk of the total losses across markets that we expected to see a year ago have already occurred," he wrote this past week. Though the market's expected return in coming years is, in relative terms, much better than a year ago, "compared to the Goldilocks pattern of the last 20 years, [it is still] pretty brutal."

How these eight valuation models stack up currently

The table below lists the eight valuation indicators I highlight in this space every month. Notice in particular where each of them stands relative to the distribution of its returns over the last number of decades. This is what Purgatory looks like on Wall Street.

                                     Latest  Month age  Beginning of year  Percentile since 2000 (100% most bearish)  Percentile since 1970 (100% most bearish)  Percentile since 1950 (100% most bearish) 
P/E ratio                            22.55   21.32      21.32              57%                                        72%                                        80% 
CAPE ratio                           29.09   28.46      28.46              74%                                        82%                                        87% 
P/Dividend ratio                     1.65%   1.74%      1.74%              80%                                        85%                                        89% 
P/Sales ratio                        2.37    2.24       2.24               91%                                        96%                                        97% 
P/Book ratio                         4.08    3.85       3.85               94%                                        93%                                        100% 
Q ratio                              1.73    1.63       1.63               89%                                        94%                                        96% 
Buffett ratio (Market cap/GDP )      1.58    1.49       1.49               89%                                        94%                                        94% 
Average household equity allocation  43.6%   43.6%      43.6%              75%                                        84%                                        88% 

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

-Mark Hulbert

(END) Dow Jones Newswires

January 28, 2023 08:00 ET (13:00 GMT)

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