We published a bearish view on US stocks today on Seeking Alpha. Below are some excerpts:
- Low interest rates reflect a weak long-term real GDP growth outlook of around 1.0%.
- Equity markets outside the U.S. show how low rates have provided little support to valuations.
- It would take an 80% decline to return long-term real return prospects to historical norms.
- Inflation unlikely to bail out equity investors.
“The fact that interest rates are low offers little compensation to equity holders if they reflect weak long-term growth prospects, which we believe they do. A combination of deteriorating demographics and continued weak productivity suggest that long-term real GDP growth is likely to come in around 1.0% rather than the 2.0% widely expected.”
“With a 1.1% adjusted dividend yield and 1.0% real GDP growth prospects, it would take a price decline of 80% to lift future return prospects back to their historical average of 6.5%. This is not to say we expect an 80% decline, but it does illustrate just how far away from normalcy we found ourselves today. Even if we assume that the required return on stocks has fallen to half of its long-term average as a result of lower real interest rates, it would still take a 50% decline for such long-term returns to be achieved.”
“The only reason to expect the current extreme monetary and fiscal policy mix to sustainably support equity prices is if they manage to create enough inflation that nominal earnings and dividends manage to rise enough to grow into their valuations. There are two reasons to suggest this is not likely. First, 10-year breakeven inflation expectations are showing no sign of such prospects, with the 10-year rate sitting at just 1.6% and trending lower. Second, as we have seen during prior periods of high inflation in the U.S., equity valuation multiples tend to suffer greatly, more than offsetting any beneficial impact from higher nominal earnings and dividends.”
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