The impact of the Fed’s quantitative easing program has not been an increase in wealth, but an increase in valuations, according to John Hussman.
Hussman argues that the Fed has pushed up returns to the short-term, making long-term investments look bad in comparison.
The impact of the Fed’s policy of quantitative easing has not been to increase “wealth” upon which a future consumption stream can be based. Instead, the effect of QE has been to increase valuations – producing high short-run returns by borrowing from long-term prospects. This has now produced a degenerate menu of long-term investment options (for passive investment strategies). Quantitative easing cannot produce wealth – it can only shift the profile of returns from the future to the present by forcing all assets to compete with zero-return cash. Now that it has done so, it is urgent for investors to weigh the prospective returns that remain, against the likely long-term risks.
That means the current investment environment does not compare favourably with long-term markets of the past. Notably, the S&P 500 over the next 10-years should have meager returns, compared to previous periods, according to Hussman.
Presently, our estimate of expected 10-year total returns for the S&P 500 is just 3.4% annually. The probable returns that were built into stock valuations in early 2009 have been compressed into the recent advance. Since 2009, to use Howard Marks’ words, investors have “bid up assets, accelerating into the present appreciation that otherwise would have occurred in the future, and thus lowering prospective returns.”
Not those prospective S&P returns today, versus the outsize returns available in 1982.
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