I gave a speech at the New York Stock Exchange last week… And attendees there were calling me “Mr. Melt Up.”
I took it as a sign of respect…
So what I’m about to say might surprise you…
While I expect more gains over the short term (one to two years), my outlook for the long run (five to 10 years) is pretty darn glum.
The basic reason is simple:
In the short term, trends matter.
In the long term, valuations matter.
Let me explain…
I have not talked a lot about valuations… mostly because valuations alone don’t kill bull markets.
But the long-term outlook for this market – based on valuations – is terrible.
Legendary investor Jeremy Grantham agrees…
He recently published a paper called “Bracing Yourself for a Possible Near-Term Melt-Up.” In it, he said a Melt Up or end-phase of a bubble is likely within the next six months to two years. And if that happens, he says, the odds of a subsequent big decline are “very, very high.”
Meanwhile, his investment firm’s forecast for large-cap U.S. stocks is a total return of NEGATIVE 4.6% a year over the next seven years. (That’s not counting inflation.)
Now, Rob Arnott of Research Affiliates – another highly respected analyst and firm – has recently released a paper about valuations… with a similarly glum conclusion.
Arnott’s research suggests a 10-year real return on stocks of just 0.4% a year.
That low real-return number is because we are starting from such high valuations today.
“No matter what adjustments we make, the U.S. market is expensive,” Arnott says. “The CAPE (cyclically adjusted P/E) ratio is not a useful timing signal for market turning points, but is a powerful predictor of long-term market returns.”
I agree with both of these guys.
Here’s what I believe: In the short run, valuation is not a good timing indicator of the top.
I expect the Melt Up to continue higher, for potentially as long as two years.
Afterward, I expect stocks to perform terribly… We should see a multiyear period in which valuations revert to the mean.
In short, markets will go up (and UP!!!)… And then, they’ll go down…
So don’t get too enamored with stocks during the Melt Up. Know in the back of your mind that the other side – the “Melt Down” – could be ugly for a while…
Source: Daily Wealth