Hussman: The Economy Is A Ponzi, And The Market’s Only Hope Is That The Bubble Continues
Oct. 11, 2010
In his latest weekly note, John Hussman continues to rail on why he thinks this market is overvalued based on traditional metrics.
His latest angle? Dividend yields.
If you look through market history prior to the valuation bubble that began in the mid-1990’s, you will observe only three times that the dividend yield on the S&P 500 dropped to 2.65%. The precise dates should be instantly familiar. August 1929, December 1972, and August 1987. These dates represented the peaks prior to the three worst market plunges of the 20th century.
Prior to the mid-1990’s, the median dividend yield on the S&P 500 had been about 4.1%. Then, the market launched into what would ultimately become a valuation bubble, followed by a decade of dismal returns for investors. Since then, the dividend yield on the S&P 500 has regularly dipped below 2.65%, and as of last week, had dropped to just 2%.
It is not a theory, but simple algebra, that the total return on the S&P 500 over any period of time can be accurately written in terms of its original yield, its terminal yield, and the growth rate of dividends. Specifically,