Predicting the Markets of Tomorrow

[EvrClrx311]

James O'Shaughnessy had a very good book (shares the title I used for this thread) that I was trying to dig up at home this weekend, about estimating ranges and how far from the long term trend we are... you know that 100 year linear line showing how the overall markets grow. You have to get outside the shorter term mindset to really appreciate it, because history does repeat and the long term tread has been fairly consistent on a macro level. Let me see if I can expand a bit backwards in time through my own research:

The things I'm most interested in are:
1) Where would the market sit today if we were straddling that long term 100+ year trend. Are we above or below it? When looking at the next 20 years, if we're below it then we're likely to have better than historical average returns moving forward, if we're above it then we're likely to have below average returns.
2) How far are we from the extremes... those times where the market peaked and hit rock bottoms. Projected forward, are we anywhere near one of them? What would the market have to be at today to be within one of those ranges?

Here goes...

Inflation adjusted Peaks and Troughs (source: MacroTrends)
Dow Jones 100 Year Historical Chart | MacroTrends...
Highs and Lows of the Dow the last 100 years that stand out:
(1915)Dec -- 2,276.88 <--- high
(1920)Dec ---- 877.21 <--- low
(1929)Jul -- 4,753.75 <--- high
(1932)May ---- 772.44 <--- low
(1937)Jan -- 3,099.01 <--- high
(1941)May -- 1,463.87 <--- low
(1966)Jan -- 7,315.35 <--- high
(1982)Jun -- 1,979.49 <--- low
(1999)Dec - 16,153.45 <--- high
(2009)Feb -- 7,875.17 <--- low

Sort of a crude start to this is to take the midway point of that first high/low cycle (1,577.05) and then also do the same at the other end (12,014.31). Then with some math we come up with the 90 year real return of the market... its trend upward. This is obviously crude, because maybe that high/low range didn't perfectly straddle the longer (200 year) average, however the further back you go the more accurate this will be. After all, we obviously got from there to now somehow, so that's a 100 year pressure... on the trend. If that makes sense.

$1,577.05 turns into $12,014.31 in 90 years with a 2.282% return. I'm guessing why this number is different from the often quoted 6-7% real return (real return being return after factoring out inflation) because it's missing the reinvestment of dividends in this MacroTrend chart. Beside the point however, it still gives us a baseline to do some math about where the DOW stands today within the ranges of deviation from the highs and lows in history. Because what we're after is taking this line and projecting it to the future...

Applying that 2.282% line to the above figures we see where the DOW would sit today if those peaks and lows were brought forward to today's time. Each of them straddling that long term line upwards for equities.


(1915)Dec -- 2,276.88 would be 22,236.20 today
(1920)Dec ---- 877.21 would be `7,652.93 today
(1929)Jul -- 4,753.75 would be 33,850.71 today
(1932)May ---- 772.44 would be `5,140.42 today
(1937)Jan -- 3,099.01 would be 18,423.01 today
(1942)May -- 1,463.87 would be `7,773.99 today
(1966)Jan -- 7,315.35 would be 22,604.54 today
(1982)Jun -- 1,979.49 would be `4,263.11 today
(1999)Dec - 16,153.45 would be 23,705.65 today
(2009)Feb -- 7,875.17 would be `9,222.62 today


We end up with an average high of 24,164.02 and and average low of 6,810.61... and average of it all being 15,487.31

Today's DOW is sitting about a thousand above that. So well within the middle range of where it could be historically, just a bit above it.


Getting to the Conclusion (assuming 3% inflation forward)...
10 years from now I'd expect the DOW to most likely be close to 25,912.97 with variances for extreme high and lows being 40,430.62 and 11,395.34 only if we are in one of those once a decade peaks of troughs about to head back up or down from it.

If we want to look at those 2026 figures in today dollars we are heading in the next decade for a 19,407.43 DOW with extreme edges being: 8,534.50 to 30,280.38

Please chime in if it appears I've missed something obvious

-Eric

 

[Gone4Good]

With the "past performance is no guarantee . . . " disclaimer, and all, your results seem entirely reasonable to me. Dow 26,000 in 10 years reflects a CAGR slightly under 5%. That doesn't sound entirely unrealistic to me given our currently overvalued market.

With dividends included, that would be around a 7% annual return. That's as good of a ballpark estimate as any.

 

[EvrClrx311]

G4G,
Thanks for the feedback. My main motivation in throwing this post together was one of curiosity. It was sparked by a debate I had with a friend last week who was convinced that the market is doomed in the coming years because things have been "too good" the last 6 years. I argued that much of our "bull" market results since the crash in 2008/2009 was simply a bounce back towards the average. Idea being... of course you're going to get great results forward from an extreme low. He seemed to dismiss this as a sign that we went from a low to a high, at which point I said I'm pretty sure we're nowhere near a high right now

I've always had a much longer term mentality when it comes to the markets. He's likely correct on a shorter time frame... year by year.

If nothing else, this will be a fun post to reference in a decade. I'll bookmark it

 

[Gone4Good]

Here's another way to think about it that doesn't yield quite so rosy a result.

This is what the S&P 500 looks like when discounted by CPI and graphed on a log scale. If we extrapolate that trend line forward another 10 years, it results in an S&P 500 at 1,364 in today's dollars (assuming I did the math correctly, which I may not have)

 

[ERD50]

...

$1,577.05 turns into $12,014.31 in 90 years with a 2.282% return. I'm guessing why this number is different from the often quoted 6-7% real return (real return being return after factoring out inflation) because it's missing the reinvestment of dividends in this MacroTrend chart. ...

Please chime in if it appears I've missed something obvious

-Eric

Not including dividends seems like an obvious problem to me!

-ERD50

 

[EvrClrx311]

Not including dividends seems like an obvious problem to me!

-ERD50

I would think that only effects the accuracy of the long term trend analysis if the dividend rate moving forward is substantially different than the one in the past. Which might actually be true? Aren't dividends way lower today than they were in the early 20th century?

I forgot where I read that... but it used to be something like as a market whole 55-75% of earnings were from dividends, and the rest from growth... and today it's flipped.

Hmmm... I'll consider this and re-investigate