#1 ·
After witnessing a spectacular rally in various equities over the last year or so—with the NYSE climbing from 3,214 points on February 1, 2007, to its ATH of 5,392 on October 15—we have spent the last few months navigating a significant correction. Some of those popular stocks that everyone rushed toward in 2007 have seen their prices plummet relative to their ATH values; some have even shed 50% of their worth. Consequently, the prevailing sentiment among forum members, and indeed the broader public, revolves around two questions: "Have we hit rock bottom?" and "When will the recovery finally begin?"
There has been considerable discussion regarding how high returns in capital markets are typical for an emerging economy in transition, and the theory that these yields will diminish as we move closer to EU integration. Within the "mutual fund" threads, the consensus seems to be that we might have one or two years of elevated returns left before average fund performance drops, leaving investors to settle for a more modest 15% annual return.
It stands to reason to ask whether there is any concrete evidence to support these projections regarding future market yields, or whether the NYSE has truly reached its floor.
Let’s start by looking at the most developed capital market in the world. How has it behaved over the last three decades?
The average annual return of US indices would likely seem laughable to a novice investor who has just discovered the stock market. They typically expect a 10% jump in a matter of months, or in certain instances, just a few days.
However, the last decade was a rather lackluster period for major global indices. Conversely, the NYSE, acting as our "transitional" index, performed quite differently. Here is a look at the performance over the past 10 years:
From this historical data, we can draw several conclusions:
1) A 15% return, which fund investors are told they should be "satisfied" with long-term, is not merely satisfactory—it would be extraordinary if achievable. Unfortunately, such a target is almost entirely unrealistic in the long run. To achieve that, funds would need to outperform an index as strong as the NYSE's recent 10-year run by a full 3%, once you factor in the 2% management fee and the 0.3% custodial bank fee. Not a single fund managed to outperform the NYSE during last spring's aggressive rally.
2) For the NYSE to reclaim its ATH, it would need to climb approximately 40% from its current level. Given its average annual return of 14.4% over the last decade, it would take roughly two and a half years to reach that mark.
The logic falls apart if this correction is merely a temporary dip caused by pension funds, and if stocks return to their 2007 levels once those funds shift from selling to buying. If that were the case, current prices would be incredibly attractive, and we would expect a massive wave of buying to trigger shortly.
The reality, however, is better illustrated by this table:
Specifically, the average P/E for the NYSE is 37. In the last 20 years, the S&P 500 has exceeded that P/E ratio only once. Meanwhile, the average P/E for the DJIA currently sits around 16, and it's worth noting that those stocks offer an average dividend yield of 2.5%—something that remains unthinkable for most companies within the NYSE.
Admittedly, because local companies are advancing more rapidly, a higher P/E is partially justifiable. However, a return on invested capital averaging 11.33% suggests that the 14.4% annual price appreciation we have enjoyed thus far is unsustainable over the long term.
What are your thoughts?
There has been considerable discussion regarding how high returns in capital markets are typical for an emerging economy in transition, and the theory that these yields will diminish as we move closer to EU integration. Within the "mutual fund" threads, the consensus seems to be that we might have one or two years of elevated returns left before average fund performance drops, leaving investors to settle for a more modest 15% annual return.
It stands to reason to ask whether there is any concrete evidence to support these projections regarding future market yields, or whether the NYSE has truly reached its floor.
Let’s start by looking at the most developed capital market in the world. How has it behaved over the last three decades?
The average annual return of US indices would likely seem laughable to a novice investor who has just discovered the stock market. They typically expect a 10% jump in a matter of months, or in certain instances, just a few days.
However, the last decade was a rather lackluster period for major global indices. Conversely, the NYSE, acting as our "transitional" index, performed quite differently. Here is a look at the performance over the past 10 years:
From this historical data, we can draw several conclusions:
1) A 15% return, which fund investors are told they should be "satisfied" with long-term, is not merely satisfactory—it would be extraordinary if achievable. Unfortunately, such a target is almost entirely unrealistic in the long run. To achieve that, funds would need to outperform an index as strong as the NYSE's recent 10-year run by a full 3%, once you factor in the 2% management fee and the 0.3% custodial bank fee. Not a single fund managed to outperform the NYSE during last spring's aggressive rally.
2) For the NYSE to reclaim its ATH, it would need to climb approximately 40% from its current level. Given its average annual return of 14.4% over the last decade, it would take roughly two and a half years to reach that mark.
The logic falls apart if this correction is merely a temporary dip caused by pension funds, and if stocks return to their 2007 levels once those funds shift from selling to buying. If that were the case, current prices would be incredibly attractive, and we would expect a massive wave of buying to trigger shortly.
The reality, however, is better illustrated by this table:
Specifically, the average P/E for the NYSE is 37. In the last 20 years, the S&P 500 has exceeded that P/E ratio only once. Meanwhile, the average P/E for the DJIA currently sits around 16, and it's worth noting that those stocks offer an average dividend yield of 2.5%—something that remains unthinkable for most companies within the NYSE.
Admittedly, because local companies are advancing more rapidly, a higher P/E is partially justifiable. However, a return on invested capital averaging 11.33% suggests that the 14.4% annual price appreciation we have enjoyed thus far is unsustainable over the long term.
What are your thoughts?