Investor Alert

MarketWatch Premium Archives | Email alerts

Jan. 23, 2021, 11:38 a.m. EST

The S&P 500 won’t even keep up with inflation in the next 10 years, this accurate indicator shows

Watchlist Relevance

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    S&P 500 Index (SPX)

or Cancel Already have a watchlist? Log In

By Mark Hulbert

The stock-market-valuation indicator with the best forecasting record is predicting that the S&P 500 Index’s total return over the next decade won’t even keep up with inflation.

Inflation will be 1.4% annualized between now and 2031, the latest forecast of the Federal Reserve Bank of Cleveland’s inflation model . And the benchmark index’s nominal 10-year total return will be only 0.7% annualized, according to the indicator.

Welcome to this month’s update of eight valuation indicators with good long-term records — a regular feature in this space. In the table at the end of this column I review their current status.

Careful readers will note that this month I am deleting one of the indicators that I had included in previous columns, and in its place I’m adding this new one with the unequaled long-term record.

This additional indicator was introduced in 2013 by the anonymous author of the Philosophical Economics blog, who dubbed it “ The Single Greatest Predictor of Future Stock Market Returns .” It is based on the average investor’s equity allocation: Of the total amount investors have allocated to equities, fixed-income and cash, how much is allocated to the stock market?

This is a contrarian indicator, with higher equity allocations a bad sign for the stock market’s subsequent long-term return.

According to the most recent Federal Reserve data, this indicator stands at 45.2%, which is 10 percentage points higher than the historical average. As you can see from the table below, this latest reading is higher than 95% of all other quarterly readings since 2000 — and higher than 94% of all readings since 1950.

To appreciate how good a track record this indicator has, consider the r-squared of a simple regression model that uses it to forecast the S&P 500’s /zigman2/quotes/210599714/realtime SPX -1.31% dividend- and inflation-adjusted return over the subsequent decade. It is an almost unbelievably high 70.1%, far higher than that of any of the other valuation indicators I feature in the table below.

That’s really saying something, since these other indicators were themselves chosen because they have some of the highest r-squareds in the stock market forecasting business.

The reason I had not included this indicator in previous monthly updates is not that it didn’t have a good track record. I excluded it because it is updated only quarterly and with a long time lag. The most recent Federal Reserve data, for example, is updated through Sept. 30.

The indicator that I have dropped from my monthly valuation table is a close relative to the much-better-known Cyclically-Adjusted Price Earnings ratio, or CAPE — which continues to appear in the table. The variant that I have dropped is the Cyclically-Adjusted Total Return Price Earnings ratio, or TR-CAPE, which differs from the CAPE in that dividends are included in its calculation. Though no doubt superior in a theoretical sense, I am dropping it because its track record is so close to that of its better-known relative, and its 10-year forecast almost identical.

For a full description of how each of the indicators in the table below is calculated, please refer to my Oct. 30 column .

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com .

-50.57 -1.31%
Volume: 2.72B
March 3, 2021 5:03p

This Story has 0 Comments
Be the first to comment
More News In

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.