Hedge Fund CIO: “We’ve Realized Roughly 3 Years Of Gains In The First 6 Months Of 2017”

As part of the local Sunday ritual, here is Eric Peters with his latest Weekend Notes, providing some context on recent, and not so recent market moves.

Weekend Notes

 

“US stocks rise roughly 7% per year,” he said. “Same holds true for Australia; basically, for all economies uninterrupted by catastrophic war at home.”

 

The 7% roughly equals 5% nominal GDP growth plus an extra 2% which is due to the S&P 500 index periodically kicking out bad companies and replacing them with better ones.

 

“Sometimes the market runs ahead of this 7% rate of return, which doesn’t mean it’s the wrong price, it simply means it’s premature.” In a world of fiat money, high prices are never wrong, they’re only early. 

 

“It took fourteen years for the stock market to return to its 1968 highs,” he continued. “And at that point in 1982, with overnight interest rates at 20% and the S&P 500 price-to-earnings multiple at roughly 8, the market still had miles to run.”

 

By the year 2000 with the S&P 500 P/E multiple at roughly 29, it was kind of the opposite. Then roughly 13 years later, it broke back above that Jan 2000 high, with a P/E ratio of roughly 17.

 

Today the trailing P/E is roughly 26, with overnight rates 19% below the 1982 levels, and 4.5% below the 2000 levels. 

 

“So we’re obviously not at a similar point to 1982,” he continued. “But where are we?”

 

Nerds forecast a 3% a year S&P 500 returns for a decade. Quants say we’re in the top few percentiles of historical valuation across every asset class (except volatility).

 

The S&P 500 is up roughly 10% this year. Which means we’ve realized roughly 3yrs of gains in the first 6mths of 2017.

 

“At some point, you rally so much that your 10yr return forecast turns flat. At which point you could go sideways for a decade.” But roughly speaking, stocks either go up, or down.


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