Prevailing market conditions continue to hold the expected stock market return/risk profile in the most negative classification we identify. That profile reflects not only extreme valuations on the most reliable measures weâ€™ve tested across history, but market internals and other features of market action that remain unfavorable. A sufficient improvement in market internals here would shift the expected market return/risk profile to a more neutral classification. That, coupled with a broader improvement in economic factors, mirroring conditions that prevailed during much of this half-cycle prior to mid-2014, could support an outlook - even at presently obscene valuations - that we might characterize as â€śconstructive with a safety-net.â€ť So while our immediate outlook is quite negative, weâ€™ll take new evidence as it comes.
In any event, looking beyond the near-term horizon, I doubt that any shift in market action will meaningfully reduce the likelihood of a 40-55% loss in the S&P 500 over the completion of the current market cycle, nor the likelihood of 0-2% total returns for the S&P 500 on a 10-12 year horizon; both which imply that we fully expect the S&P 500 Index itself to be below present levels 10-12 years from today. Put simply, long-term investment outcomes are tightly linked to valuations, but near-term market outcomes are linked to investor attitudes toward risk-seeking and risk-aversion, which are best inferred from the uniformity of market internals across individual securities, industries, sectors, and security-types, including debt securities of varying creditworthiness. Continue Reading Â»