Not to keep beating the same drum, but John Hussman seconds Andrew Smithers’s points about the U.S. stock market’s overvaluation. Hussman’s bete-noire is the common use of "forward operating earnings" as a means of concluding that the market is cheap–a practice whose many flaws merely start with the fact that the historical average P/E multiple on "forward operating earnings" is about 11-times, not the 15-times that many investors use (Hussman cites Cliff Asness here). Hussman is quick (and wise) to say that this condition doesn’t mean that stocks will tank–just that future returns for the S&P 500 won’t look anything like 10% a year.
After triangulating with a variety of valuation methods, including the dividend discount model, Hussman puts the fair value of the S&P 500 at 850, 40% below today’s level. So anyone counting on U.S. stocks to appreciate at 10% a year for the next decade had better 1) scale back expectations, and/or 2) pray that it’s different this time.
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