INCOMING VALUATION OF STOCK PURCHASES FORETELL ULTIMATE RETURNS

A recent article on John Mauldin’s website discusses the oft-repeated axiom that stock market returns, at least for periods under twenty-years, depend heavily on the price paid for the initial purchase. This concept is consistent with the theory of Secular Bull and Bear Market cycles.

Dr. Prieur du Plessis, who is managing director of Plexus Asset Management based in Cape Town, South Africa, breaks out historical S&P 500 Index returns based upon both the Price-Earnings ratio and the dividend return of the S&P when one invested.

For example, if you invested when the P/E of the S&P was a low 8.5, your average 10-year forward returns would be 11%. However, if you invested when the P/E was 21.6, your average, 10-year forward return would be a meager 3.2%.

The same relationship appears when considering dividend yields of the S&P. When dividend yields are high (and stocks are relatively low-priced), your 10-year forward returns will be high. Similarly, if the dividend yield is low (and stock Sre high-priced), your future returns will be correspondingly low.

Plessis concludes:

Based on the above research findings, with the S&P 500 Index's current PE of 18,4 and dividend yield of 1,8%, investors should be aware of the fact that the market is by historical standards not in cheap territory, arguing for luke-warm returns

The graphs posted below illustrate these averaged returns.

STAY ABROAD IN THE DESERT OF THE REAL!

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