SPX/SPY future price can be calculated by take earnings and compounding out in time using analyst growth projections. You can do this for any stock. Spx in 5 years maybe 1.6x times higher which is approximately a 5-6% annual return.
Historically speaking, sp500 yields 7% to 10% so current prices are promising wimpy returns according to analysts.
And if the analysts are wrong or something changes, the risk is definitely to the downside because sp500 is already trading at twice the expected growth rate of future expectations.
The legendary Investor Peter Lynch prefers to buy stocks when they are trading at 1x the growth rate in PE valuation.
So ya, ill pass on the SP500 index wimpy potential returns.
Great analysis, thanks for sharing. I could not agree more. As I have said elsewhere, it is quite amazing that the current US market cash yield of 5.25% is significantly higher than the yield on a classic portfolio of 60% stocks and 40% bonds, which currently yields only 3%. Historically, it is not the norm for risk-free cash to outperform risky assets, but it is always a warning sign. This was the case in 2000-2001 and again in 2006-2008, when the US stock market fell by 50%. Then interest rates fell and reasonable relationships were restored. The problem is that today, as in 2000 and 2007, this clear return signal is being ignored. Most investors are focusing on the S&P 500 investments that have performed best over the past five years. In effect, they are buying past returns rather than current ones. This also explains the ongoing love affair with extremely expensive tech stocks. We saw the same behaviour after the 2008 financial crisis: Risk assets returned 4%, cash 0%. But for many years after that, hardly anyone wanted equities because they were perceived as too "risky" in the rear-view mirror. That should be a warning sign, shouldn't it? Well, who knows, but I think it is.
optionfarmers
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@ReallyMe, do you think the fear of inflation is encouraging people? because then the downside risk can be ignored if the crowd is confident devaluation is the bigger risk. thinking of all the crypto and anti dollar crowd. also young people i know are confident just buying SPY is the only way, no discussion. thoughts?
ReallyMe
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@optionfarmers, I think people have no other choice. If they don't buy S&P 500, what is the enduring alternaive? What can people trust these days? Crypto? Gold? Everyone rolls their dice...
optionfarmers
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@ReallyMe, so a sense of urgency or fear of missing out if they dont? You make me think of how Buffett parks cash and waits 1-3 years to find his openings, "wait for the fat pitch". that dude has invested for almost a century and my guess most of the invest public has only a few years in them.
ReallyMe
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@optionfarmers, yeah, I guess it's kind of like the fear of earning less if you do nothing and just wait, It's like driving on an unknown road - you don't know when the next turn is coming and where it's going, but you still believe if you just park and don't drive at all, you'll probably be further from destination
@optionfarmers, i guess buffett probably would park and wait for sunny day and good music on the radio then. :D
ReallyMe
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@optionfarmers, maybe the old man would do that, although I think it makes more sense to wait for bad weather and then invest / go... :) but if you have no map and no destination, all roads are the same...
optionfarmers
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@ReallyMe, isnt that the same to a value guy tho? sunny day to one is a storm to other?
ReallyMe
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@optionfarmers, yes, absolutely. in the end it always goes like this, what the impatient loses ends up in the account of the patient one.
As I have said elsewhere, it is quite amazing that the current US market cash yield of 5.25% is significantly higher than the yield on a classic portfolio of 60% stocks and 40% bonds, which currently yields only 3%. Historically, it is not the norm for risk-free cash to outperform risky assets, but it is always a warning sign. This was the case in 2000-2001 and again in 2006-2008, when the US stock market fell by 50%. Then interest rates fell and reasonable relationships were restored. The problem is that today, as in 2000 and 2007, this clear return signal is being ignored. Most investors are focusing on the S&P 500 investments that have performed best over the past five years. In effect, they are buying past returns rather than current ones. This also explains the ongoing love affair with extremely expensive tech stocks. We saw the same behaviour after the 2008 financial crisis: Risk assets returned 4%, cash 0%. But for many years after that, hardly anyone wanted equities because they were perceived as too "risky" in the rear-view mirror.
That should be a warning sign, shouldn't it? Well, who knows, but I think it is.