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A valuation model based on eight indexes says stocks will lag behind bonds and even fall over the next 10 years.


For the first time in years, valuation-focused advisors have something to brag about as they near the end of the year.

This year-end period is a traditional time to review the previous year’s forecasts, celebrate successes, and assess what happened with failures.

A year ago, I reported that the valuation models with the best track record concluded that the stock market was overvalued. S&P500
SPX,
+0.06%

has dropped 18% since then and the tech-driven Nasdaq Composite Index
COMPUTER,
-0.40%

down 29%.

It will be too early for advisors to use these models to open their Champagne bottles. They have warned for years of an impending bear market, and so far this year they have been wrong.

In previous years, they defended themselves by arguing that valuation patterns are not short-term indicators, but should instead be evaluated over the long-term. It’s not fair for them now, after a calendar year to finally follow their predicted bearish scenario, to suddenly focus on the short term.

The more intellectually honest exercise is to remind people that valuation models have little ability to predict, if at all, over a one-year period. To the extent their track record is impressive, it’s a much longer period, such as a decade.

The accompanying chart shows, for the eight valuation models I regularly track in this column, what they predicted a decade ago. (Please see below.) On average, they predict that the S&P 500 will generate an inflation-adjusted and dividend-adjusted return of 5.2% between then and today.

I give that average prediction a pass. On the one hand, it’s significantly less than the 9.7% total net annualized return the stock market has actually generated since then.

On the other hand, these models accurately forecast that stocks will outperform bonds. A decade ago, 10-year Treasury bonds
TMUBMUSD10Y,
3,733%

is predicted to generate negative net annualized total returns of 0.7% over the next decade, based on then-current yields and breakeven inflation rates 10 years later. As it turns out, the 10-Year Treasuries actually produced a negative 2.6% total net annualized return since then.

In other words, these valuation models 10 years ago predicted that stocks would outperform bonds over the next decade with an annualized rate of return of 5.9 percentage points. While well below the 12.3 percent annualized margin by which stocks actually outperform bonds, it probably shouldn’t be too difficult for investors to follow the lead of these models. bear when being converted from bonds to stocks.

As you can also see from the chart, the current 10-year average stock market prediction of these eight models is an actual total return of negative 1.0% annually. That number is not only far below the 5.2% average forecast from a decade ago, but also well below the expected increase for 10-year Treasuries of 1.4% daily. year above inflation. So these models are now telling us that the returns for stocks over the next decade will be a lot lower than they were in the last decade, and they may even underperform bonds.

How pricing patterns stack up historically

The table below shows how each of my eight valuation metrics compares to its historical range. While each hinted at an undervalued market compared to what was common earlier this year, they have yet to predict an overvalued market.

Latest

Last month

The begin of the year

Percentage since 2000 (100 most discounted)

Percentage since 1970 (100 most discounted)

Percentage since 1950 (100 most discounted)

P/E . Ratio

21.48

20.65

24.23

48%

66%

75%

CAPE . ratio

29.29

28.22

38.66

76%

83%

eighty seven%

P/Dividend Ratio

1.68%

1.72%

1.30%

78%

84%

89%

P/Revenue Ratio

2.42

2.33

3.15

90%

91%

91%

P/Book Ratio

4.02

3.87

4.85

ninety three%

88%

88%

Q . ratio

1.70

1.64

2.10

88%

ninety three%

95%

Buffett Ratio (Market Cap/GDP)

1.59

1.54

2.03

88%

95%

95%

Average household equity allocation

44.8%

44.8%

51.7%

85%

88%

91%

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 [email protected].

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