VRAI - Estimating Future Stock Returns September 2022 Update

Summary

• The stock market needs to fall around 20% to be at parity with lower-rated investment-grade bonds.
• The US corporate bond market is still more attractive than the US stock market.
• Be ready for the stock market to fall further after the Fed stops tightening, when the recession ensues, and buy stocks amid the panic.

On September 30, 2022, the S&P 500 was priced to return 4.14%/year over the next ten years. Given the rally since then, that return has shrunk to 3.20%/year. Does that sound attractive? It is lower than the yield on the 10-year T-note and lower than current inflation (which is falling like a stone, don't tell the geniuses at the FOMC).

And you could be adventurous, as I was when I was a corporate bond manager (2001-2003) buying long single-A and BBB/Baa bonds. Even at 10-year maturities, you can get well over 5% for sound credits.

The stock market needs to fall around 20% to be at parity with lower-rated investment-grade bonds. This is not pleasant news, but given the media drumbeat of:

Stocks always beat bonds! Stocks always beat bonds! Stocks always beat bonds! Stocks always beat bonds! Stocks always beat bonds!

It needs to be said that it is not always true. It wasn't true in the 2000s decade. It wasn't true during the Great Depression.

I'm keeping this short this evening. The US corporate bond market is still more attractive than the US stock market. If the S&P 500 drops below 3100, with no changes in interest rates, then the stock market will be a better buy.

So be ready for the stock market to fall further after the Fed stops tightening, when the recession ensues, and buy stocks amid the panic.

PS - when the tech giants are firing people, that is a sign that they are no longer growth stocks.

Disclosure: None

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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