Estimating Future Stock Returns, March 2022 Update

Image credit: All images belong to Aleph Blog

Well, finally the bear market… at 3/31/2002 the S&P 500 was priced to return a trice less than zero in nominal terms. After the pasting the market received today, that figure is 3.57%/year nominal (not adjusted for inflation). You would likely be better off in an ETF of 10-year single-A rated bonds yielding 4.7% — both for safety and return.

I will admit that my recent experiment buying TLT has been a flop. I added to the position today. My view is that the long end of the curve is getting resistant to the belly of the curve, and thus the curve is turning into the “cap” formation, where the middle of the curve is higher than the short and long ends. This is a rare situation. Usually, the long end rallies in situations like this. The only situation more rare than this is the “cup” formation where the middle of the curve is lower than the short and long ends.

I will have to update my my old post of “Goes Down Double-Speed.” We’ve been through three cycles since then — bear, bull, and now bear again. People get surprised by the ferocity of bear markets, but they shouldn’t be. People get shocked at losing money on paper, and thus the selloffs happen more rapidly. Bull markets face skepticism, and so they are slow.

What are the possibilities given where the market is now? When the market is expecting 3.57% nominal, give or take one percent, what tends to happen?

The Fed cares about things in this order:

• Preserve their own necks
• Preserve the banks, and things like them
• Fight inflation
• Fund the US Government
• Promote nominal GDP growth, though they will call it reducing labor unemployment. The Fed really doesn’t care about labor unemployment, or inequality. They are a bourgeois institution that cares about themselves and their patrons — those who are rich.

I know this post is “all over the map.” My apologies. That said, we in a very unusual situation featuring high debt, high current inflation (that won’t last), war, plague, and supply-chain issues. How this exactly works out is a mystery, especially to me — but I am giving you my best guess here, for whatever it is worth. It’s worth than double what you paid for it!

Full disclosure: long TLT for clients and me