Estimating Future Stock Returns

itwasntme001

seacaitch wrote: »

At the March 2009 lows the average investor equity allocation suggested a ~16% 10yr annual total return; the actual outturn was ~16.3%. Not bad.




Not recommended.

I was looking at 10 years from Oct 2009 - still a pretty good fit.


Given the sharp drop in forecasted returns (green line) why would you not be more cautious about returns over the next say 3-5 years? It seems to be in line with the economic slowdown (perhaps will be worse i.e. a long recession) and bad technicals (broadening top in s&p and other global indices have gone nowhere).


No wonder bonds have gone up so much...

Thrugelmir

itwasntme001 wrote: »

No wonder bonds have gone up so much...

Central Bank purchasing perhaps? Against a backdrop of falling issuance.

itwasntme001

Thrugelmir wrote: »

Central Bank purchasing perhaps? Against a backdrop of falling issuance.

FED started quantitative tightening a few years back and since then yields have fallen sharply. It appears the fall in yields is due to genuine concerns of economic growth prospects and subdued inflation projections.

Thrugelmir

itwasntme001 wrote: »

FED started quantitative tightening a few years back and since then yields have fallen sharply. It appears the fall in yields is due to genuine concerns of economic growth prospects and subdued inflation projections.

A few years back? The Fed started in 2008. Recently has had to intervene in the money markets again as the withdrawl that commenced in 2017 was too aggressive,

ECB now has an open ended mandate. Next year that will hit a self imposed limit of 30% of German Bunds. More rule bending ahead one suspects. Though there's growing discontent from some quarters of the entire policy.

This is the continued fallout of the 2006-2008 GFC. Abnormal measures for unchartered waters.

itwasntme001

Thrugelmir wrote: »

A few years back? The Fed started in 2008. Recently has had to intervene in the money markets again as the withdrawl that commenced in 2017 was too aggressive,

ECB now has an open ended mandate. Next year that will hit a self imposed limit of 30% of German Bunds. More rule bending ahead one suspects. Though there's growing discontent from some quarters of the entire policy.

This is the continued fallout of the 2006-2008 GFC. Abnormal measures for unchartered waters.

Quantitative TIGHTENING started a few years back not easing. Yields still fell since then so can not be explained by the FED.


Anyway back to the original topic - since the forecast has been so right since the 1940/50s, why should it stop being right going forward? The forecast suggests to me that stock market will have a very tough time over the next few years. Given yields, perhaps an overweight cash position is best to be in right now and be ready to pounce on opportunities?

Thrugelmir

itwasntme001 wrote: »

Quantitative TIGHTENING started a few years back not easing. Yields still fell since then so can not be explained by the FED.

As Treasuries reach maturity further bonds are bought to maintain the status quo. Fed , like the BOE, ECB and BoJ hoovers up whatever is available on the market.

Central Bank interest rates have continued to fall back.

China needs to find a home for the procceds of some of the large trade $ surplus it generates with the USA.

Some investors may find the P/E ratings of Amazon, Apple, Netflix a little too racey for their liking.

With demand high. New issuance has no requirement to offer high yields.

itwasntme001

Anyone's thoughts on the model? I have never seen a model this accurate before. I know it does not give any indication of what to buy, but a model that forecasts accurately forward annual returns has got to be worth taking a serious look at.

bd10

itwasntme001 wrote: »

Quantitative TIGHTENING started a few years back not easing. Yields still fell since then so can not be explained by the FED.


Anyway back to the original topic - since the forecast has been so right since the 1940/50s, why should it stop being right going forward? The forecast suggests to me that stock market will have a very tough time over the next few years. Given yields, perhaps an overweight cash position is best to be in right now and be ready to pounce on opportunities?

If I am looking at equity indices or individual funds/stocks, they are below moving averages. I know, hardly scientific and a bit painting by numbers but not a "buy". S&P 500 at 3k mark, tested in a few times in the past weeks/months. Not going anywhere at the moment. Earnings are so-so or bit disappointing. IPO flops or even pulled, lack of confidence (or silly biz idea to begin with). Some of their valuations were just ridiculous. Struggling to get excited about stocks at the moment. Massive high yield / corp. bonds bubble plus liquidity concerns. See chapter 3, last 2 pages:
https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019#Chapter3
The scale of these liquidity concerns is much larger than I expected. Didn't think that half of high yield funds were affected... scary, this can spread like wildfire once set off. If there should be a run for the exit in this segment, other risky assets (equities) get drawn into that. The current state of markets is not stable in my humble opinion.

Crashy_Time

itwasntme001 wrote: »

I have personally de-risked my portfolio somewhat and hold a decent cash position - having sold some trackers and kept my single shares and managed funds. I think in the current environment it pays to be a stock picker. Of course i sound a bit hypocritical given the above post, but i believe you make your own luck in life so why not take some chances?


I am now wondering what to do with the cash - i just think there are not many great bargains to be found in stocks and i certainly dont want to track an index. Bonds also do not look attractive. So that really leaves property which i think even in London looks like an ok bet given we are closer to a brexit deal.

I think you are concentrating your risk, not "de-risking".

itwasntme001

bd10 wrote: »

If I am looking at equity indices or individual funds/stocks, they are below moving averages. I know, hardly scientific and a bit painting by numbers but not a "buy". S&P 500 at 3k mark, tested in a few times in the past weeks/months. Not going anywhere at the moment. Earnings are so-so or bit disappointing. IPO flops or even pulled, lack of confidence (or silly biz idea to begin with). Some of their valuations were just ridiculous. Struggling to get excited about stocks at the moment. Massive high yield / corp. bonds bubble plus liquidity concerns. See chapter 3, last 2 pages:
https://www.imf.org/en/Publications/GFSR/Issues/2019/10/01/global-financial-stability-report-october-2019#Chapter3
The scale of these liquidity concerns is much larger than I expected. Didn't think that half of high yield funds were affected... scary, this can spread like wildfire once set off. If there should be a run for the exit in this segment, other risky assets (equities) get drawn into that. The current state of markets is not stable in my humble opinion.

Yeh i agree. The s&p500 has gone pretty much nowhere in over 18 months. All other global indices are down compared to 18 months ago. Not a good sign. I personally sold some of my trackers and remain in cash for now. Still have a fair bit invested but those are in funds and stocks i like either for the long term or would do well as a defensive.


I think the model looks really good and am quite amazed at how accurate it is going back to the 1950s. To me it suggests the next few years will be quite painful for stocks, although we could of course rally say 10% from here before things get really bad. Not worth the risk imo.