Tuesday, May 3, 2016

068. Long Range Market Perspective

Market conditions continue to be characterized by the likelihood of extremely poor long-term and full-cycle outcomes, with expected 10- to 12-year estimated Standard & Poor's 500 nominal total returns in the 0% to 2% range, negative expected real returns on both horizons and the continued likelihood of a 40% to 55% interim market loss over the completion of the current cycle; a decline that would represent only a typical run-of-the-mill cycle completion, based on valuation measures most tightly related with actual subsequent market returns across history.

John Hussman: <http://www.gurufocus.com/news/401664>

Perhaps the principal driver of stock market prices is the rising cost of urban living. For instance, a home purchased in 1975 in a prosperous Connecticut community for $250,000 (Index 52.1) should be now priced in 2016 for 236/52 = 4.54 times more, or $1,134,615. With current market price of about $2,000,000, the  real appreciation of the home price would be about 76%, of about 1.9%/year. If the occupancy worth of a $2 million home is calculated at current low cost interest rates of 4.5% is about $90,000.year minus taxes, of about $60,000,  the homeowner enjoys a benefit of 4.5% - 1.9% or 2.6%, which is the real financial advantage of home ownership


http://data.bls.gov/pdq/SurveyOutputServlet
IMPLICATIONS: The steadily rising cost of living of 600% over 40 years makes sense only if financial investments generate, on the average, 1.9%/year, or if invested  in home  ownership, that yields 2.6%/year. Recently, the cost of living index has been increasing only 0.1%/year, which places long range forecasts into a more favorable light, Recent cost of living increases are therefore not a primary influence on the wellbeing of retired seniors.

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