will the SP500 double in 7 years?

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will the SP500 double in 7 years?

yes, it will have doubled nominally in 7 years
78
35%
no, it will not have doubled in 7 years
128
57%
yes, it will have doubled nominally and in real terms as well in 7 years
17
8%
 
Total votes: 223

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LH
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will the SP500 double in 7 years?

Post by LH » Thu Dec 22, 2011 3:23 am

Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH

PS here is a CAGR link that can be interesting to play around with
http://www.moneychimp.com/features/market_cagr.htm

555
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Re: will the SP500 double in 7 years?

Post by 555 » Thu Dec 22, 2011 4:49 am

I predict in the next seven years its high point will be more than double its low point.

Valuethinker
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Re: will the SP500 double in 7 years?

Post by Valuethinker » Thu Dec 22, 2011 6:20 am

LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH

PS here is a CAGR link that can be interesting to play around with
http://www.moneychimp.com/features/market_cagr.htm
A better return of future estimates of US market would be 7% nominal (equity risk premium over risk free bond of 3-4% pa). Risk free interest rates are now much lower, equity returns are likely to be much lower. 8% if we are lucky (gross of fees).

The whole 1980s-90s period distorts measures of equity returns. I believe the best 2 decades for stocks ever recorded.

Go back to the 70s, the real return of stocks was bad due to inflation. Then that drops away. Makes the nominal numbers not useful.

riverguy
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Re: will the SP500 double in 7 years?

Post by riverguy » Thu Dec 22, 2011 6:50 am

By looking back, especially over the last 30 years, you have to ask yourself can the massive debt fueled bubble continue? We've pulled forward tons of demand. Can that really continue? Is the stock market going to go up as people and govts are forced to delever? Is the stock market going to go up while 10,000 boomers retire everyday, sell their stocks, and put a strain on govt finances with social security and medicare?

Why is the S&P even at 1200 right now? Suspension of mark to market. A government rule change had to save the markets otherwise every big bank was insolvent (in reality they still are, but thats another thread). The fundamentals just aren't there on the macro level for a stock market at this level IMO.

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Re: will the SP500 double in 7 years?

Post by Snowjob » Thu Dec 22, 2011 6:54 am

I guess I'm a perma bear, but you really need a lot of global wage inflation combined with comodity deflation or at least stagnation in order for the market to move that much in 7 years. I think speculation as measured by high PE's on a broad basis wont be back for a long time. We know what the current demographics story is, the sovergn and personal debt story, the over capcacity of housing and factories. I dont see a double in the S&P over that time horizon. I do see it for individual names (fraud / act of god / act of congress / nuke hitting the corporate hq and factories aside) , just not for the market in agregate. I can always be wrong and we could go higher, but my individual names will participate on the upside. If im right I think I will have sustained significant outperformance by holding individual stocks. Only time will tell if I will be compensated or descimated by my risk taking.

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Re: will the SP500 double in 7 years?

Post by Valuethinker » Thu Dec 22, 2011 7:03 am

riverguy wrote:By looking back, especially over the last 30 years, you have to ask yourself can the massive debt fueled bubble continue? We've pulled forward tons of demand. Can that really continue? Is the stock market going to go up as people and govts are forced to delever? Is the stock market going to go up while 10,000 boomers retire everyday, sell their stocks, and put a strain on govt finances with social security and medicare?

Why is the S&P even at 1200 right now? Suspension of mark to market. A government rule change had to save the markets otherwise every big bank was insolvent (in reality they still are, but thats another thread). The fundamentals just aren't there on the macro level for a stock market at this level IMO.
I often find with Americans they think the world stops at the 2 coasts (and they are not even sure what's north of the 48th parallel ;-)). So from a European/ more global perspective:

1. demographics of the world are another matter. And the US is an interesting place to invest-- lots of great companies, global in what they do, selling to all those new consumers.

So you've got international savers investing in the US and international customers. The problem at the moment is not a lack of capital it's a lack of places to invest it (extreme risk aversion)-- hence the low government bond yields. We are stuck in the zero interest rate trap.

2. I've never found a convincing correlation between aging and stock prices. Maybe there is one ie the logic that the developed world is getting older, unloading stocks. But it seems to me markets are efficient: undervaluations are corrected, eventually.

Government debt loads get paid off. Public sector debt is not symmetric with private sector debt in its effects on the macroeconomy. Yes there is personal and corporate deleveraging-- hence the current predicament.

3. US stock market is not cheap by historic levels. But I don't believe the market is confused vis a vis the correct value of bank balance sheets. ie there is no sudden revelation about value of bank assets out there (at least in USA). There is the Euro banking crisis, that could have a big knock on effect.

4. I am much more sanguine about US bank balance sheets, which have taken the pain up front, and the US housing market problems are in the market, vs. some of the European ones. This is not 2008-- the US is no longer the centre of the storm.

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Re: will the SP500 double in 7 years?

Post by ResNullius » Thu Dec 22, 2011 8:05 am

With the overhang of national debt suffered by most of the world, along with less government spending in the future, it's hard to imagine how the market could have consistent positive returns ovef the next 7 years. Just saying.

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Re: will the SP500 double in 7 years?

Post by johnubc » Thu Dec 22, 2011 8:28 am

Is it going to rain tomorrow? You can predict it, you just do not know it.

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Re: will the SP500 double in 7 years?

Post by beareconomy » Thu Dec 22, 2011 8:45 am

First off, since 1926, the s and p has NOT returned 10% nominal. It has been 8.6% nominal. About 4.6% real and 4% inflation.

Now, the growth we have had since 1926 has been due to a rather high GDP growth rate of about 3-4%, which just about corresponds to the 4.6% real or so since 1926.

Now, we have been having very lousy GDP growth of 1-2% over the last 10 years if you go by government statistics. Looking at the shadow statistics website, we have been running about -1% growth the last 10 years. So with those numbers, it is IMPOSSIBLE for the s and p to double in the next 10 years nominally.

So if you are going to tell me the s and p is going to double in value over the next 10 years, I would probably say you are insane unless you know something I don't know.

This is the reality of the post 9/11 period, which I refer to as stagnant growth. Since March of 2000, looking at the vanguard website, the s and p 500 has returned 1.19% nominally per year on average. I really don't see how things will improve with the current policiticians we elect. Depressing?

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Optimistic
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Re: will the SP500 double in 7 years?

Post by Optimistic » Thu Dec 22, 2011 8:47 am

LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH

PS here is a CAGR link that can be interesting to play around with
http://www.moneychimp.com/features/market_cagr.htm
Will the S&P 500 pay no dividends over the next 7 years? :shock:

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Re: will the SP500 double in 7 years?

Post by 3CT_Paddler » Thu Dec 22, 2011 9:17 am

My uneducated opinion is that the next 7 years will continue to provide mediocre returns. Public and private debt will still be an issue. But at some point over the next 20 years I think investors will be rewarded for their patience.

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grayfox
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Re: will the SP500 double in 7 years?

Post by grayfox » Thu Dec 22, 2011 9:36 am

LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH

PS here is a CAGR link that can be interesting to play around with
http://www.moneychimp.com/features/market_cagr.htm
That link is very interesting. I looked at the return by decade. I also added the starting dividend yield D/P and smoothed earnings yield E10/P

Code: Select all

Table 1. S&P Nominal & Real Return by Decade
          NOMINAL                   INFLATION-ADJUSTED   VALUATION AT START       
1-Jan   31-Dec    CAGR     SD        CAGR     SD        D/P     E10/P
1880     1889     5.73     12.64     8.06     13.17     4.01
1890     1899     5.72     13.02     5.58     13.58     4.09     5.81
1900     1909     9.88     19.23     7.32     17.95     3.57     5.35
1910     1919     4.67     13.86    -1.79     14.07     4.39     6.87  <-- negative decade
1920     1929    15.47     18.80    16.56     20.01     5.98    16.70  <-- followed by good decade
1930     1939    -0.12     33.09     1.96     31.04     4.47     4.48
1940     1949     9.06     16.05     3.51     18.26     5.07     6.11
1950     1959    19.61     19.13    17.01     19.47     6.81     9.31
1960     1969     7.78     14.15     5.13     14.59     3.22     5.45
1970     1979     5.80     18.69    -1.45     18.64     3.50     5.85  <-- negative decade
1980     1989    17.68     12.23    11.97     11.90     5.14    11.30  <-- followed by good decade
1990     1999    18.30     13.65    14.94     14.04     3.28     5.87
2000     2009    -0.99     20.18    -3.42     19.38     1.16     2.28  <-- negative decade
2010     2019                                           1.98     4.87  <-- but start with low yield
2020     2029
Looking at the inflation-adjusted CAGR column, 1910-1919 and 1970-1979 decades had negative return, and each were followed by a decade with good returns. 2000-2009 was negative, so maybe the next decade will follow that pattern and be good.

But then, 1920 and 1980 started with high dividend and earnings yields, 5.98/16.70 and 5.14/11.30. But 2010 started with relatively low dividend and earnings yield, 1.98/4.87. Low yields foretell low returns.

On Jan 1, 2010 S&P was 1123.58. At 5% real return, 2% dividend yield, and 3% inflation, that would imply 6% annual nominal price increase. So after 9 years, on Jan 1, 2010 S&P 500 would be 1790.82

Therefore, I voted no. (BTW, there is a wide range that S&P 500 could be at, maybe from 1800 +/- 900. So there is a small probability the index could be above 2487.)
Last edited by grayfox on Thu Dec 22, 2011 9:52 am, edited 1 time in total.

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Re: will the SP500 double in 7 years?

Post by Valuethinker » Thu Dec 22, 2011 9:48 am

3CT_Paddler wrote:My uneducated opinion is that the next 7 years will continue to provide mediocre returns. Public and private debt will still be an issue. But at some point over the next 20 years I think investors will be rewarded for their patience.
change 20 to 30 and I'd agree.

The interesting question though is whether we have to get to some climax of pessimism, where the SP500 again sells for less than 10 times PE, before we get there.

In which case, prepare for a rollercoaster. It's taken a long time for Japan to get 'cheap', and there's no catalyst in terms of economy or corporate governance that will provide for a dramatic reappraisal. Japan is as cheap as it has been since it was an emerging stock market in the 60s, but there's no evident thing that is going to move it.

US would could have some collapse of confidence, PE of 10x, a la 1974 say, and then we could have recovery. UK fell -90% 1973-74, recovered but still had a bad decade, then 1979-1990 it went up something like 4 times I think.

By contrast, the US housing market is now unambiguously 'cheap' but I suspect it will stay that way for a few years at least.

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LH
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Re: will the SP500 double in 7 years?

Post by LH » Thu Dec 22, 2011 10:29 am

Valuethinker wrote:
LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH

PS here is a CAGR link that can be interesting to play around with
http://www.moneychimp.com/features/market_cagr.htm
A better return of future estimates of US market would be 7% nominal (equity risk premium over risk free bond of 3-4% pa). Risk free interest rates are now much lower, equity returns are likely to be much lower. 8% if we are lucky (gross of fees).

The whole 1980s-90s period distorts measures of equity returns. I believe the best 2 decades for stocks ever recorded.

Go back to the 70s, the real return of stocks was bad due to inflation. Then that drops away. Makes the nominal numbers not useful.
Yep, 70s happened. yep 80s 90s happened. ditto great depression.

Nominal numbers are nominal numbers. One could say nominal 10 year treasury yields are not useful, as inflation could spike like it did in 70s. Or have deflation. It is what it is.

One could argue 73 74, 1933 "distorts" equity returns the other way.... The history is what it is. I do not really follow? The whole thing is a distortion? 33ish distorts the 50s, 80-90s distorts the 70s? the current period distorts the past? Or are you pointing out that the dow graph is a jagged squiggly line, ups downs and such, not a nice smooth line?

In terms of a 7 percent nominal being "better" I am very unclear that that is true/predictive at any given time. It seems a gordon equationish type approach. I do not view the gordon equation as ever had much meaningful predictive value. Nor the methodology that you use, I have seen it reference before, but never have seen where its said, oh here, here is where it was predictive...... It sounds nice. But many things sound nice.

Then the "risk free" you cite of 3-4 percent? I assume that is a TIPS reference of some sort, as its "risk free". But 10 years TIPS are not yielding 3-4 percent? Or are you talking nominal treasuries as your "risk free" reference, and ignoring inflation risk?

Regardless, I assume you are saying that the stock market will not double in 7 years nominally, as you are calling for 7 percent nominal as your better expectation?

The whole deal is more meant as a psych counter balance to the current mentality, the distortion of the current recent market over the past 10s of years, (30 if one looks at bonds v stocks, ouch), the mentality of myself included.

I will put you down as a no in the official roster, as per rule of 72 : )

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LH
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Re: will the SP500 double in 7 years?

Post by LH » Thu Dec 22, 2011 10:36 am

johnubc wrote:Is it going to rain tomorrow? You can predict it, you just do not know it.
Yes it will rain tommorrow, I can know it with very reasonable certainty, always raining somewhere I would imagine : )

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Re: will the SP500 double in 7 years?

Post by Rodc » Thu Dec 22, 2011 10:42 am

My gut reaction is no (absent enough inflation to seriously distort things). I would be fine with being wrong, which could easily happen.

I worry a bit that stocks are as high as they are now because all the alternatives are returning so little. If interests rates climb, people may be less interested in stocks and prices will fall (at least in the shortish term of a few years).

Europe could come unglued rather easily. If that fails to happen we could see stocks go up - that would be nice. If things there worsen, we could be in for some lousy returns for a while.

I don't see a lot to feel good about.

But perhaps "stocks climb a wall of worry" will help us out.

Not way to have a lot of confidence in any prediction.

Which is always true. :)
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: will the SP500 double in 7 years?

Post by manuvns » Thu Dec 22, 2011 10:42 am

may be 1600 in 7 years

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Re: will the SP500 double in 7 years?

Post by larrydmsn » Thu Dec 22, 2011 11:00 am

Nominally yes, real term no. And most of the gain will come in the last 3 years, according to my crystal ball.

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bob90245
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Re: will the SP500 double in 7 years?

Post by bob90245 » Thu Dec 22, 2011 11:03 am

Given there are no good forecasters (they typically get it wrong) and the general consensus of participants on this thread forecasting sub-par returns, I would say the S&P 500 will definitely double. :D
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: will the SP500 double in 7 years?

Post by PreserveCapital » Thu Dec 22, 2011 11:23 am

The S&P can only grow, over time, as much as the underlying economy grows.

Assume that right now it's within 10 - 20% of "fair value" either way.

If we average 3% GDP growth + 3% inflation over the next seven years, then I can see maybe 40-50% nominal increase in the S&P with maybe a 20% margin of error on top of that, so maybe as much as a 60% nominal increase.

Obviously give black swans there could be a "spike" up or down, you could have some kind of bubble for some reason, but that wouldn't represent a sustainable/long term increase.

In real terms our economy simply doesn't seem to be growing faster than maybe 3% annual clip. Based on 3% the S&P might grow 20-30% real during the next seven or so years. Again accounting for spikes which would not be sustainable growth.

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Re: will the SP500 double in 7 years?

Post by bob90245 » Thu Dec 22, 2011 12:03 pm

PreserveCapital wrote:The S&P can only grow, over time, as much as the underlying economy grows.
Only if you ignore the fact that companies in the S&P 500 derive half or more revenues from economies outside the US. And this ignores the possibility of one or more Apples growing from small- or mid-cap to large-cap.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: will the SP500 double in 7 years?

Post by jh » Thu Dec 22, 2011 12:12 pm

.....
Last edited by jh on Fri May 04, 2012 10:16 pm, edited 1 time in total.

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Re: will the SP500 double in 7 years?

Post by KyleAAA » Thu Dec 22, 2011 12:12 pm

So when you say double, do you mean just the price or do you mean total return? I would not bet that the price doubles in 10 years. But with dividends? Probably.

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Re: will the SP500 double in 7 years?

Post by Calum » Thu Dec 22, 2011 12:59 pm

bob90245 wrote:Given there are no good forecasters (they typically get it wrong) and the general consensus of participants on this thread forecasting sub-par returns, I would say the S&P 500 will definitely double. :D
I'm of the same opinion. So many long term bears, sounds like a wise move to stay the course.

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Re: will the SP500 double in 7 years?

Post by mptfan » Thu Dec 22, 2011 1:17 pm

LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH
You are mixing up two different things... the total return of the S&P 500 includes dividends, but the index does not. So you cannot simply double the index and conclude that represents the total return.

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Re: will the SP500 double in 7 years?

Post by mptfan » Thu Dec 22, 2011 1:21 pm

PreserveCapital wrote:The S&P can only grow, over time, as much as the underlying economy grows.
Not according to our mentor, John Bogle. He says that the price of stocks in the future will be determined by three things... 1) earnings growth, 2) dividend yield, and 3) a change in the P/E multiple. Number 3 is independent of the underlying economy.

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Re: will the SP500 double in 7 years?

Post by bob90245 » Thu Dec 22, 2011 1:32 pm

mptfan wrote:
PreserveCapital wrote:The S&P can only grow, over time, as much as the underlying economy grows.
Not according to our mentor, John Bogle. He says that the price of stocks in the future will be determined by three things... 1) earnings growth, 2) dividend yield, and 3) a change in the P/E multiple. Number 3 is independent of the underlying economy.
But over time, your number three will likely revert to the mean. So over time, it won't meaningfully affect the growth of the S&P 500. This isn't to say that over the short term changes in P/E won't affect the S&P 500. But that is a different discussion from what we are talking about on this thread.
Last edited by bob90245 on Thu Dec 22, 2011 1:38 pm, edited 1 time in total.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: will the SP500 double in 7 years?

Post by Rodc » Thu Dec 22, 2011 1:37 pm

mptfan wrote:
LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH
You are mixing up two different things... the total return of the S&P 500 includes dividends, but the index does not. So you cannot simply double the index and conclude that represents the total return.
Thanks for pointing that out. I meant to bring it up and forgot. I went with the start of the post, ie including reinvested dividends. I voted no with reinvested div so definitely no without. :)

But time will tell.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Re: will the SP500 double in 7 years?

Post by mptfan » Thu Dec 22, 2011 2:09 pm

bob90245 wrote:
mptfan wrote:
PreserveCapital wrote:The S&P can only grow, over time, as much as the underlying economy grows.
Not according to our mentor, John Bogle. He says that the price of stocks in the future will be determined by three things... 1) earnings growth, 2) dividend yield, and 3) a change in the P/E multiple. Number 3 is independent of the underlying economy.
But over time, your number three will likely revert to the mean. So over time, it won't meaningfully affect the growth of the S&P 500. This isn't to say that over the short term changes in P/E won't affect the S&P 500. But that is a different discussion from what we are talking about on this thread.
The market can stay irrational longer than you can stay solvent.

And I don't think it is different than what we are talking about. If you are talking about 30 years, I might agree with you, but the question asked about 7 years. Are you suggesting that 7 years is long enough for the P/E to revert to the mean? If you are, then we will have to disagree.

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Re: will the SP500 double in 7 years?

Post by leo383 » Thu Dec 22, 2011 2:33 pm

It will fluctuate.

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Re: will the SP500 double in 7 years?

Post by bob90245 » Thu Dec 22, 2011 2:49 pm

mptfan wrote:
bob90245 wrote:
mptfan wrote:
PreserveCapital wrote:The S&P can only grow, over time, as much as the underlying economy grows.
Not according to our mentor, John Bogle. He says that the price of stocks in the future will be determined by three things... 1) earnings growth, 2) dividend yield, and 3) a change in the P/E multiple. Number 3 is independent of the underlying economy.
But over time, your number three will likely revert to the mean. So over time, it won't meaningfully affect the growth of the S&P 500. This isn't to say that over the short term changes in P/E won't affect the S&P 500. But that is a different discussion from what we are talking about on this thread.
The market can stay irrational longer than you can stay solvent.

And I don't think it is different than what we are talking about. If you are talking about 30 years, I might agree with you, but the question asked about 7 years. Are you suggesting that 7 years is long enough for the P/E to revert to the mean? If you are, then we will have to disagree.
OK, this makes things a little different. PreserveCapital was saying "over time" which I interpret to be longer than 7 years. Probably closer to 20 years or more.

But 7 years would fall into to the short term category. And like you say, probably not enough time for reversion to the mean to occur.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: will the SP500 double in 7 years?

Post by pkcrafter » Thu Dec 22, 2011 5:48 pm

I wonder why anyone would ask this question.

Beareconomy wrote:

Code: Select all

First off, since 1926, the s and p has NOT returned 10% nominal. It has been 8.6% nominal.
It is my understanding that the S&P500 annualized return since 1928 is 12.7%. According to Vanguard the return is 10.3% since 1976.

Returns from Gummy--

http://www.gummy-stuff.org/returns.htm


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Re: will the SP500 double in 7 years?

Post by momar » Thu Dec 22, 2011 6:10 pm

Barring collapse in Europe, the US is poised for strong economic growth. And the ECB looks like it is responding to the crises on the downlow, despite their rhetoric; 2 year Italian bonds are back under 5% and Spanish 2 years are under 3.5%.

The average age of the auto fleet is nearly 11 years, while the historic average of the fleet is 7-7.5 years. Used car prices are way up. New car sales will start surging in the coming year.

The bust in construction is far greater than the boom was. Apartment vacancies are at historic lows, and rents are rapidly rising. New 5-unit and larger starts are showing strong growth.

Household formation has been far below trend since the recession started; there is huge pent up demand. The ratio of houses:households is near the lows seen in the early 90s. We are on the verge of a housing shortage, hard as it is to believe.

New seasonally adjusted unemployment claims are down to 360,000 and dropping.

Private payrolls have been growing, and we would be seeing reasonably strong job numbers except for continuing government layoffs (read: teachers). How big, exactly, will class sizes get before parents revolt? If government layoffs ease, and especially if the government begins hiring again, we are looking at over 200k jobs per month.

Household debt is shrinking.

If things stay on track, the growth will feed on itself and the economy should be booming within a year or two. The trends are all pointing more and more to real recovery, although it is not certain yet.

I say yes, in nominal terms.
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Re: will the SP500 double in 7 years?

Post by bob90245 » Thu Dec 22, 2011 7:03 pm

pkcrafter wrote:Beareconomy wrote:

Code: Select all

First off, since 1926, the s and p has NOT returned 10% nominal. It has been 8.6% nominal.
It is my understanding that the S&P500 annualized return since 1928 is 12.7%. According to Vanguard the return is 10.3% since 1976.

Returns from Gummy--

http://www.gummy-stuff.org/returns.htm
Gummy stopped updating his returns data last century. Go to this website and get returns from 1871 through this year.

http://politicalcalculations.blogspot.c ... rtips.html

If you enter 1926.01 and 2011.09, you'll get total nominal returns of 9.66%. Not quite 10% anymore. But close. :D
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: will the SP500 double in 7 years?

Post by pkcrafter » Thu Dec 22, 2011 7:16 pm

Bob, I know gummy quit posting gummy stuff and I miss it. Thanks for the link, 10.3% to 9.66%--what a difference a decade can make.


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Re: will the SP500 double in 7 years?

Post by ruralavalon » Thu Dec 22, 2011 9:00 pm

Can't say, my crystal ball is in the shop :( .
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Re: will the SP500 double in 7 years?

Post by VictoriaF » Thu Dec 22, 2011 9:17 pm

On 30 May 2007 the S&P 500 closed at 1,530.23. Assuming 7% nominal gain, it would take it 10 years to double, i.e., by 2017 to get to 3,060.46.

Today, 22 Dec 2011 the S&P 500 closed at 1,254.00. Its double value is 2,508, which will happen before 3,060.46, and thus before 2017.

:lol: :lol: :lol:

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Re: will the SP500 double in 7 years?

Post by Valuethinker » Fri Dec 23, 2011 3:43 am

LH wrote:[

Then the "risk free" you cite of 3-4 percent? I assume that is a TIPS reference of some sort, as its "risk free". But 10 years TIPS are not yielding 3-4 percent? Or are you talking nominal treasuries as your "risk free" reference, and ignoring inflation risk?

)
Yes the Capital Asset Pricing Model either uses nominal (so we have risk free 3-4%, equity risk premium of say 4%, so 8% overall) OR you can do it in real terms (1% for risk free bonds, 4-5% for equities, to be honest I think 3% for equities is probably a safer assumption, say 2% inflation). You'll get to the same numbers.

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Re: will the SP500 double in 7 years?

Post by Valuethinker » Fri Dec 23, 2011 3:46 am

PreserveCapital wrote:The S&P can only grow, over time, as much as the underlying economy grows.

Assume that right now it's within 10 - 20% of "fair value" either way.

If we average 3% GDP growth + 3% inflation over the next seven years, then I can see maybe 40-50% nominal increase in the S&P with maybe a 20% margin of error on top of that, so maybe as much as a 60% nominal increase.

Obviously give black swans there could be a "spike" up or down, you could have some kind of bubble for some reason, but that wouldn't represent a sustainable/long term increase.

In real terms our economy simply doesn't seem to be growing faster than maybe 3% annual clip. Based on 3% the S&P might grow 20-30% real during the next seven or so years. Again accounting for spikes which would not be sustainable growth.
There's huge governance risk. For example in Canada, a handful of conglomerates managed to siphon off shareholder value to managers and controlling shareholders for *decades* (Brascan!). Canadian market was a pariah for a very long time amongst North American equity investors, it habitually performed so poorly relative to the US.

That's Canada. There are a lot worse examples in other places. Such as Japan.

It's not a dead cert that economic growth leads to equity returns for external minority shareholders.

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Re: will the SP500 double in 7 years?

Post by Valuethinker » Fri Dec 23, 2011 3:53 am

momar wrote:Barring collapse in Europe, the US is poised for strong economic growth. And the ECB looks like it is responding to the crises on the downlow, despite their rhetoric; 2 year Italian bonds are back under 5% and Spanish 2 years are under 3.5%.

The average age of the auto fleet is nearly 11 years, while the historic average of the fleet is 7-7.5 years. Used car prices are way up. New car sales will start surging in the coming year.

The bust in construction is far greater than the boom was. Apartment vacancies are at historic lows, and rents are rapidly rising. New 5-unit and larger starts are showing strong growth.

Household formation has been far below trend since the recession started; there is huge pent up demand. The ratio of houses:households is near the lows seen in the early 90s. We are on the verge of a housing shortage, hard as it is to believe.

New seasonally adjusted unemployment claims are down to 360,000 and dropping.

Private payrolls have been growing, and we would be seeing reasonably strong job numbers except for continuing government layoffs (read: teachers). How big, exactly, will class sizes get before parents revolt? If government layoffs ease, and especially if the government begins hiring again, we are looking at over 200k jobs per month.

Household debt is shrinking.

If things stay on track, the growth will feed on itself and the economy should be booming within a year or two. The trends are all pointing more and more to real recovery, although it is not certain yet.

I say yes, in nominal terms.
On Euro I think they have just kicked the can down the road another 12 months. The Crisis is not over. The process where we all try to devalue against the Germans, without leaving the Euro, by competitive austerity, and in turn the Germans try to devalue against us, is a recipe for recurrent stagnation and Crisis.

On the economy I agree recovery is likely, although whether it will be 2012 I don't know (lots of storm clouds). However the US will be marred by the debt overhang, by uncertainty in part engendered by the political deadlock and by efforts to reduce government spending at all levels. Debt-asset bubbles take a *long* time to recover from (see Reinhardt and Rogoff: that chart Krugman threw up in his blog, comparing US at this point to the Swedish crash, was pretty striking).

So the outlook for the future for the US is sluggish growth and high unemployment.

And then there is China to worry about. High Speed Trains that fall off the rails. Windturbines that don't connect to the grid. Empty cities of housing. Shoddily built hotels (this I can attest to!). A nice little asset bubble.

If I have one truly great fear it can be summarized in one word: Iran. Midnight is coming on that one. Iran has won literally all the rounds of poker in the Middle East since the early 2000s, but its ally Syria is up in flames and on the verge of a Sunni-Shia civil war, and the Iranian nuclear ambitions are on a collision course with US and Israeli policy.

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Re: will the SP500 double in 7 years?

Post by Valuethinker » Fri Dec 23, 2011 3:55 am

ResNullius wrote:With the overhang of national debt suffered by most of the world, along with less government spending in the future, it's hard to imagine how the market could have consistent positive returns ovef the next 7 years. Just saying.
Consistent returns? No. But then they never did. Even in the fabled 1990s.

Positive returns?

Don't get *too* pessimistic. Corporate earnings keep growing, and there is still a desire by US Boards to get their share prices up (eg by share buybacks).

Equities are likely to generate positive returns, but there will also be bad years.

Remember markets climb the 'Wall of Worry'. When we quit worrying (2000) that's when the market has topped.

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Re: will the SP500 double in 7 years?

Post by riverguy » Fri Dec 23, 2011 8:55 am

momar wrote:Barring collapse in Europe, the US is poised for strong economic growth. And the ECB looks like it is responding to the crises on the downlow, despite their rhetoric; 2 year Italian bonds are back under 5% and Spanish 2 years are under 3.5%.
Like valuethinker has said, the can has simply been kicked in Europe. Nothing structural has changed. They know nothing except how to paper over problems. No one wants to let lenders who made bad loans take their medicine. This is the same in the US. IMO nothing will change until we default the bad debt. It is a huge overhang on the economy.
momar wrote: The average age of the auto fleet is nearly 11 years, while the historic average of the fleet is 7-7.5 years. Used car prices are way up. New car sales will start surging in the coming year.
I doubt it. GM dealer inventory is at all time highs. New cars aren't going to move. People will continue to hang onto their older cars because they can not afford new.
momar wrote: The bust in construction is far greater than the boom was. Apartment vacancies are at historic lows, and rents are rapidly rising. New 5-unit and larger starts are showing strong growth.

Household formation has been far below trend since the recession started; there is huge pent up demand. The ratio of houses:households is near the lows seen in the early 90s. We are on the verge of a housing shortage, hard as it is to believe.
Why do you think more people are renting? They can't afford or qualify to purchase their own home. I would say this is not good for the overall economy. We need to clear out the shadow inventory and let the market clear. If you are talking about single family homes in regards to housing shortage, that is quite laughable.
momar wrote: New seasonally adjusted unemployment claims are down to 360,000 and dropping.

Private payrolls have been growing, and we would be seeing reasonably strong job numbers except for continuing government layoffs (read: teachers). How big, exactly, will class sizes get before parents revolt? If government layoffs ease, and especially if the government begins hiring again, we are looking at over 200k jobs per month.
200,000 people join the workforce every month. If you are adding 200k jobs a month that is simply treading water and most likely a bad thing as quality jobs are being replaced with service jobs. The unemployment rate is dropping because the denominator is shrinking. Not a good thing.
momar wrote: Household debt is shrinking.

If things stay on track, the growth will feed on itself and the economy should be booming within a year or two. The trends are all pointing more and more to real recovery, although it is not certain yet.
What trends? Is it that 46 million Americans and climbing are on food stamps? This is 15% of the country. Or is it the US govt mashing the debt pedal to the floor and only being able to squeak out marginal increases in GDP? The private economy isn't there.
momar wrote: I say yes, in nominal terms.
Only if there is some massive government interference. Look at 2009, it took the US allowing banks to lie about their balance sheets to kick off the March 09 rally. The entire stock market is dependent on the suspension of mark to market and ZIRP.

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Re: will the SP500 double in 7 years?

Post by grayfox » Fri Dec 23, 2011 10:04 am

LH wrote: SP500 is at 1,243.72
So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?
Here's another look at the question.

At close yesterday, S&P 500 P=1254 and CAPE=20.98. So earnings must be E10= $59.77.

If P/E10 holds constant at 20.98, then earnings E10 would have to double.
If P/E10 mean reverts down, then E10 has to more than double.
And, of course, if there is another stock market bubble and P/E10 goes back up to 40...don't hold your breath!

So if we can forecast P/E10 and E10 we can forecast the price, P.

Let's look at earnings first. After Tax Earnings equals Sales * Net Profit Margin After Taxes. Aggregate Sales is GDP. From 1950 to 2010, real GDP grew at 3.27% p.a. But since 2000, U.S. GDP growth fell behind the exponential growth curve. (See chart) I would not count on 3% GDP growth. Maybe 1.5%

Image

But net profit margin after tax has expanded above the long-term average of about 6% to about 9%. The problem with growing earnings by expanding profit margins is that its a one-shot deal. NPM can't expand indefinitely. Plus it's well known that profit margins mean revert.

Image

Since profit margins can't expand indefinitely, then earnings growth in the long-term will be limited to U.S. GDP growth which is stuck at around about 1.5%. IF CAPE stays constant, 1.5% growth over 7 years will put the S&P500 at 1651.

But what will P/E10 be in 2019? The chart show CAPE peaking in 2000 at about 40, and it has been generally trending down for the past 11 years. The current value is 20.98, mean=16.42 and median=15.82. Mean reversion would want CAPE to fall. Also if there is momentum in CAPE, the long-term trend is down.

Here's a range of outcomes, assuming 2% inflation.

GOOD Scenario. 3.2% Real GDP Growth (2011 ERP forecast). Net Profit margins stay at 9%. Then E10 grows to $89.66. CAPE stays the same at 21. S&P 500 would be 1881.

LIKELY Scenario. 1.5% Real GDP Growth (same as 2000-2010). Net Profit margins stay at 9%. Then E10 grows to $78.71. CAPE stays the same at 21. S&P 500 would be 1651.

BAD Scenario. 1.5% Real GDP growth. Net Profit Margins mean revert to 6%. Then E10 falls to $45. CAPE mean reverts from 21 to 16.42. S&P 500 would be 861

The range is from 861 to 1881, with 1651 being a likely scenario. Doesn't seem realistic to expect 2487. Now if there was 7% RGDP growth (impossible), or NPM expanded to 12% (an even bigger share for the 1%); or P/E10 expanded to 28 (another stock bubble); or some combination. (The only other possibility is high inflation which raises all prices.)
Last edited by grayfox on Fri Dec 23, 2011 10:32 am, edited 1 time in total.

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Re: will the SP500 double in 7 years?

Post by LH » Fri Dec 23, 2011 10:31 am

mptfan wrote:
LH wrote:Historically, the stock market has near a 10 percent nominal rate of return, and a 7 percent real rate of return. So in 7 years, nominally, the market can be expected to double, and in ten years, can be expected to double in real terms.

Not quite what has happened recently though, but not unusual at all.

SP500 is at 1,243.72

So say on January 1st, 2019 will the SP500 be greater than 2,487 or less?

just wondering,

LH
You are mixing up two different things... the total return of the S&P 500 includes dividends, but the index does not. So you cannot simply double the index and conclude that represents the total return.
you are certainly correct. that converts a semi kludge, using nominal instead of real to hit the 7 year double, to a full kludge neglecting the dividends : )
Ah well, basically nobody thought 2007 would happen. I think few think the next big boom will happen : )

In 1981, they had no clue, the 80s and 90s would happen. Rinse Repeat
Last edited by LH on Fri Dec 23, 2011 10:39 am, edited 3 times in total.

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Re: will the SP500 double in 7 years?

Post by momar » Fri Dec 23, 2011 10:33 am

riverguy wrote:
Like valuethinker has said, the can has simply been kicked in Europe. Nothing structural has changed. They know nothing except how to paper over problems. No one wants to let lenders who made bad loans take their medicine. This is the same in the US. IMO nothing will change until we default the bad debt. It is a huge overhang on the economy.
Kicking the can down the road is underrated. Nevertheless, the recent action by the ECB makes me hopeful that they actually recognize the problem. They clearly didn't just 6 months ago.
riverguy wrote: I doubt it. GM dealer inventory is at all time highs. New cars aren't going to move. People will continue to hang onto their older cars because they can not afford new.
The point is that people can't hold onto older cars forever. Eventually they break. Eventually the price of used cars goes up, which has already happened, and there is no cost savings buying that 2007 Camry.

BTW seasonally adjusted annuals rate of sales were up nearly 15% for November 2011 compared with November 2010.
riverguy wrote: Why do you think more people are renting? They can't afford or qualify to purchase their own home. I would say this is not good for the overall economy. We need to clear out the shadow inventory and let the market clear. If you are talking about single family homes in regards to housing shortage, that is quite laughable.
I'm quite aware of why people are renting. The point is that multi-unit construction is poised for a strong recovery; starts are already rapidly trending up. They aren't back yet, but they could be soon. Yes, there is still an overhang in potential foreclosures. but housing starts have been extremely depressed for several years now. That cannot continue indefinitely. As I mentioned, the house:household ratio is not high, but rather low. That's why I didn't say there is a housing shortage yet.

Housing starts have already increased nearly 100k since the bottom of the recession. Multi-unit starts are up 80% year over year.
riverguy wrote: 200,000 people join the workforce every month. If you are adding 200k jobs a month that is simply treading water and most likely a bad thing as quality jobs are being replaced with service jobs. The unemployment rate is dropping because the denominator is shrinking. Not a good thing.
Over 200k per month, sir. over.
riverguy wrote: What trends? Is it that 46 million Americans and climbing are on food stamps? This is 15% of the country. Or is it the US govt mashing the debt pedal to the floor and only being able to squeak out marginal increases in GDP? The private economy isn't there.
I'm quite aware of how horrible the recession has been, no need to be snarky.
riverguy wrote: Only if there is some massive government interference. Look at 2009, it took the US allowing banks to lie about their balance sheets to kick off the March 09 rally. The entire stock market is dependent on the suspension of mark to market and ZIRP.
We'll just have to agree to disagree, and it isn't certain yet. But pressure is building for a recovery, in my opinion.
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Re: will the SP500 double in 7 years?

Post by momar » Fri Dec 23, 2011 10:39 am

I will admit I have been completely wrong before; I really thought that "recovery summer" was coming 2 years ago, just looking at the jobs data month by month.

But I'm an optimist, despite the fact that I graduated into the Great Recession along with many of my friends.
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Re: will the SP500 double in 7 years?

Post by grayfox » Fri Dec 23, 2011 10:53 am

momar wrote: We'll just have to agree to disagree, and it isn't certain yet. But pressure is building for a recovery, in my opinion.
Let's say that the economy recovers as you say and has 3.2% p.a. real growth over the next 7 years. And say inflation is 3% p.a. That's nominal GDP growth of 6.2%

Let's say further that profit margin remains constant and P/E also remains constant. Starting from a level of 1254 at the end of 2011 and growing at 6.2% p.a., by the beginning of 2019 the S&P500 index would only grow to 1910.60.

To get to 2487 by Jan 1 2019, would require either 1. an expansion in profit margins, 2. expansion in P/E ratio or 3. high inflation. Which scenario are you envisioning?

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Re: will the SP500 double in 7 years?

Post by bob90245 » Fri Dec 23, 2011 11:29 am

grayfox wrote:Let's look at earnings first. After Tax Earnings equals Sales * Net Profit Margin After Taxes. Aggregate Sales is GDP. From 1950 to 2010, real GDP grew at 3.27% p.a. But since 2000, U.S. GDP growth fell behind the exponential growth curve. (See chart) I would not count on 3% GDP growth. Maybe 1.5%
If you ignore that companies in the S&P 500 derive half or more revenues from outside the US. This also ignores the possibility that one or more Apples grow from small- or mid-cap to large-cap.
Ignore the market noise. Keep to your rebalancing schedule whether that is semi-annual, annual or trigger bands.

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Re: will the SP500 double in 7 years?

Post by grayfox » Fri Dec 23, 2011 11:54 am

bob90245 wrote:
grayfox wrote:Let's look at earnings first. After Tax Earnings equals Sales * Net Profit Margin After Taxes. Aggregate Sales is GDP. From 1950 to 2010, real GDP grew at 3.27% p.a. But since 2000, U.S. GDP growth fell behind the exponential growth curve. (See chart) I would not count on 3% GDP growth. Maybe 1.5%
If you ignore that companies in the S&P 500 derive half or more revenues from outside the US. This also ignores the possibility that one or more Apples grow from small- or mid-cap to large-cap.
Suppose that instead of using U.S. GDP growth, we use World GDP growth rate.

World real GDP growth rate has averaged about 3% over the past several decades and also since 2000. (While the developed world like U.S., Japan and Europe has seen slower growth in the 21st century, the developing world has seen higher growth making up for it.)

3% growth is basically the good scenario above, which still doesn't get the S&P500 doubling without 1. expansion of Profit Margins, 2. expansion of P/E, or 3. high inflation.

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