How low will the S&P 500 go? Buffett and Shiller know

Whatever will be, will be, but the long-term is ours to see


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Every trader’s secret wish is to be psychic. If we could only know in advance whether the market was going to go up or down.

Well, good luck trying to predict next year’s return—or even just tomorrow’s. But surprisingly, there are several recognized methods for projecting the S&P 500’s SPX, +0.72% return in the next 7 to 15 years, and they’re pretty good.

Decade-length forecasts won’t help any day traders make big profits this week. But longer-term investors can benefit a lot from these forward-looking estimates. Whatever goal you may be saving money for—a kid’s college tuition or a financial-freedom day that may be 10 years in the future—you want the answer to two questions:

Are we entering a “go-go decade,” such as 2009–2018, when most stocks grow up, up, up?

Or is this the beginning of a “bummer decade,” such as 2000–2009, when stock markets around the world crashed twice, ending not far from where they started?

If the next 10 years look like a downer, dude, diversifying your portfolio into securities other than stocks may pay you big dividends.

Financial experts like Warren Buffett and Robert Shiller are creators of long-term projection methods with data that goes back more than half a century. It’s well known that Buffett is one of the world’s richest people, and that Shiller won a 2013 Nobel Prize in Economics partly for developing his forecasting formula. Whether or not these seers actually have crystal balls, things have worked out pretty well for them.

Whatever goes up must eventually come down

Stephen Jones, a financial and economic analyst who works in New York City, tracks the formulas that several market wizards have disclosed. He recently updated his numbers through Dec. 31, 2018, and shared them with me. Buffett, Shiller, and the other boldface names had nothing to do with Jones’s calculations. He crunched the financial celebrities’ formulas himself, based on their public statements.

The graph above doesn’t show the S&P 500’s price levels. Instead, it reveals how well the projection methods estimated the market’s 10-year rate of return in the past. The round markers on the right are the forecasts for the 10 years that lie ahead of us. All of the numbers for the S&P 500 include dividends but exclude the consumer-price index’s inflationary effect on stock prices:

Shiller’s P/E10 predicts a 2.6% annualized real total return. Take today’s S&P 500 price and divide it by its companies’ average inflation-adjusted earnings over the past 10 years. This gives you a ratio that suggests whether the market is overpriced or underpriced. If you could buy one “share” of the S&P 500 index, your account would be worth around $2,700. After 10 years of 2.6% gains, you’d have $3,490. (Controversy alert: Various economists have proposed a number of improvements in the way Shiller’s ratio should be calculated.)

Buffett’s MV/GDP says minus 2.0%. Divide the S&P 500’s market value by the U.S. gross domestic product. Buffett wasn’t the first person to suggest this metric, but he’s said on the record that it’s “probably the best single measure of where valuations stand.” If the index fell 2.0% annualized, your $2,700 would turn into $2,206. Not so great.

Tobin’s “q” ratio indicates minus 0.5%. This metric divides the market value of all U.S. equities (not just the ones in the S&P 500) by the cost to replace all of the companies’ assets. It’s based on academic papers by economists James Tobin, a 1981 Nobel laureate, and William Brainard. This formula predicts that your S&P 500 account will drift slightly lower in real terms, not quite keeping up with inflation.

Jones’s Composite says minus 4.1%. Jones uses Buffett’s formula but adjusts for demographic changes. For example, as America’s population ages, this reduces economic demand. The resulting Demographically and Market-Adjusted (DAMA) Composite has predicted the S&P 500’s 10-year returns more closely than any of the other formulas since 1964. Let’s hope he’s wrong. A 4.1% annualized loss would drive your $2,700 account down to $1,776 after 10 years. That would be a 34% decline, almost as bad as the “lost decade” of 2000 through 2009.

The predictions might seem far apart, but they aren’t. The forecasts are all much lower than the S&P 500’s annualized real total return of about 6% from 1964 through 2018.

Jones is the first to say that these formulas, including his own, aren’t guarantees and can’t be used to time the market. After all, the S&P 500 could go up for the next five years at a 1% real rate, before dropping 9% a year for the next five years. The initial rally, followed by a fear cycle, would suffice to reduce your account to $1,776. That’s not a prediction—nothing about the market happens in a straight line—but remember that the S&P 500 has crashed much harder than a 34% loss TWICE in the past two decades.

“The market’s return over the past 10 years,” Jones explains, “has outperformed all major forecasts from 10 years prior by more than any other 10-year period.” He attributes this to the unprecedented stimulation that the Federal Reserve pumped into the economy (and is now removing—watch out below). Markets tend to revert to their average performance over time, which is not nearly as much fun as it sounds.

If you can’t use these predictions to time the market, what good are they?

For long-term investors, the likelihood that the market is overpriced and will eventually pull back to a lower valuation should flash a bright yellow “caution” light. A disappointing decade is not the time to gamble your money on a 100% stock portfolio. Diversifying into other types of assets can prevent any one index—such as the S&P 500—from dragging down your performance.

Long-established strategies such as Lazy Portfolios, which MarketWatch has tracked for years, and the newer Muscular Portfolios, encompass numerous asset classes besides just U.S. stocks and bonds. Those diversifying assets include real-estate investment trusts, commodities, precious metals, and non-US stocks and bonds.

During the 2007–2009 bear market, the S&P 500 lost 56%, adjusted for dividends and inflation. In the same period, Vanguard’s long-term Treasury fund VUSTX, +0.60% gained 18%, and iShares’ gold IAUF, -0.24% actually rose 22%. No mater how bad the stock market may get, something else is always going up.

You are the captain of your own destiny, but you don’t have to go down with the ship when the S&P 500 hits the inevitable rocks. Diversify now.

Jones’s latest calculations aren’t publicly available yet, but you can read all about his methods in a Social Sciences Research Network white paper.

The anointing of Juan Guaidó

The battle for Venezuela’s future

The world’s democracies are right to seek change in Latin America’s worst-governed country

IF PROTESTS ALONE could oust a president, Nicolás Maduro would already be on a plane to Cuba. On January 23rd at least 1m Venezuelans from across the country took to the streets demanding Mr Maduro step down. They were answering the call of Juan Guaidó, who last week proclaimed himself the rightful head of state. Mr Guaidó has won the backing of most of Latin America, as well as the United States and Europe. Protests planned for February 2nd promise to be even bigger. But Mr Maduro is supported by the army as well as Russia, China and Turkey. As The Economist went to press, he was still holding on to power.

Much is at stake. Most important is the fate of 32m Venezuelans made wretched by six years under Mr Maduro. Polls suggest that 80% of them are sick of him. Other countries are also hurt by Venezuela’s failure. The region is struggling with the exodus of over 3m of its people fleeing hunger, repression and the socialist dystopia created by the late Hugo Chávez. Europe and the United States suffer from Venezuela’s pervasive corruption, which enhances its role as a conduit for narcotics. And as world leaders pile in for Mr Maduro or against him, they are battling over an important idea which has lately fallen out of favour: that when a leader pillages his state, oppresses his people and subverts the rule of law, it is everybody’s business. 
The scale of the disaster Mr Maduro has brought down upon Venezuela is hard to comprehend. In the past five years GDP has fallen by half. Annual inflation is reckoned to be 1.7m per cent (the government no longer publishes the numbers), which means that bolívar savings worth $10,000 at the start of the year dwindle to 59 cents by the end. Venezuela has vast reserves of oil and gas, but the state oil company has been plundered and put under one of the country’s 2,000 generals, who has watched production tumble to 1.1m barrels a day. People are malnourished and lack simple medicines, including antibiotics. Hospitals have become death traps for want of power and equipment. Blaming his troubles on foreign conspiracies, Mr Maduro has rejected most offers of humanitarian aid.

Despite this litany of suffering many outsiders, especially on the left, argue that the world should leave Venezuelans to sort out their differences. Some adopt Mr Maduro’s view that Mr Guaidó’s claim to the presidency, recognised immediately by the United States, is really a coup. Russia, which has worked hard to discredit the idea that Western intervention can ever be benign or constructive, is reported to have sent 400 troops from a private military contractor, also spotted in Syria, Ukraine and parts of Africa, to protect either the regime or Russian assets.

Abandoning Venezuela to the malevolent rule of Mr Maduro would be wrong. If anyone has launched a coup it is he. He was inaugurated on January 10th for a second term having stolen last year’s election. In his first term, won in 2013 in another dubious vote, he eroded democracy by silencing critical media and eviscerating the constitution. He packed the electoral commission and the supreme court with puppets and neutered the national assembly, which the opposition controls. By contrast, Mr Guaidó has a good claim to legitimacy. As head of the national assembly, he serves as acting president if the office is vacant—which, because Mr Maduro is not a legitimate occupant, it is.

The question is not whether the world should help Mr Guaidó, but how. This week the United States, still Venezuela’s main trading partner, imposed what amounts to sanctions on oil exports and on imports of the diluents needed to market its heavy oil. By ordering that payments for Venezuelan oil must be put in bank accounts reserved for Mr Guaidó’s government, the United States aims to asphyxiate the regime, in the hope that the armed forces will switch to Mr Guaidó.

One danger is that Mr Maduro digs in and orders the security forces and the colectivos, organised thugs at the regime’s service, to impose terror. Another is that the United States overplays its hand. Just now it is working with the Lima group of regional governments. But its sanctions could hurt the people more than the regime. If, bent on regime change, it acts unthinkingly, it could come to be seen once again in Latin America as imperialist and overbearing. Russia is portraying the United States’s intervention as an attempt to dominate its backyard. Its media are already saying that Vladimir Putin’s interest in Ukraine is no different. The situation is a test of President Donald Trump and his foreign-policy team, including the hawkish national security adviser, John Bolton. This week Mr Bolton hinted at the use of American troops. Barring state violence against American citizens, that would be a mistake.

Mr Guaidó’s backers have ways to help without resorting to force or dirty tricks. These fall into two categories. The first includes incentives for Venezuelans to demand change, for the army to abandon the regime and for Mr Maduro to go. Now that Mr Guaidó has been recognised as interim president, he stands to control billions of dollars of Venezuela’s foreign assets if power shifts. The national assembly has passed a law offering an amnesty to soldiers and civilians who work to re-institute democracy. Mr Maduro is being promised the chance to flee the country.

The second way to help is to let Venezuelans know that the world is ready if Mr Guaidó takes power. The lesson from the Arab spring is that even a leader who starts by sweeping away a tyrant must bring improvements rapidly or risk losing support. The immediate priorities will be food and health care.

The very fact of a new government will help stop hyperinflation, but Venezuela will also need real money from abroad—international lenders, including the IMF, should be generous. The to-do list is long: Venezuela will need to remove price controls and other distortions and build a social safety-net. It must restart the oil industry, which will entail welcoming foreign investment.

Its debt will need restructuring—including the debt to Russia and China which is due to be paid in oil. And amid all this, Mr Guaidó’s caretaker government must hold elections.

A generation ago, Venezuela was a functioning state. It can be again. It is blessed with oil and fertile land. It has an educated population at home and in the diaspora that fled. And in Mr Guaidó it has a leader who, at last, seems to be able to unite the fractious opposition. But first it must get rid of Mr Maduro.

Carmakers risk bumps in the road to collaboration

New Ford and VW partnership may face strains similar to those at Renault and Nissan

Peter Campbell and Patti Waldmeir in Detroit

A Ford worker on the assembly line. Ford is to make a commercial van and pick-up truck for Volkswagen © FT montage / Bloomberg

On dealership forecourts across the world, rival car brands vie for consumers’ attention and business.

But often behind the scenes, those competitors are working together, helping each other out by supplying engines or sharing technical knowhow.

The little-seen world of car collaborations received its newest member last week, when Ford and VW announced a sweeping alliance that will begin making commercial vehicles for each other, but may extend to co-developing electric cars, self-driving systems and other future vehicles.

Collaborations between otherwise-fierce rivals are not new in the industry. General Motors and Ford used to develop vehicle transmission parts together, while BMW and Mercedes-Benz-owner Daimler buy parts together.

But to prosper from the coming wave of expensive technologies, from battery cars to autonomy, manufacturers will need to seek financial strength in numbers.

“We have to reduce the amount of money everybody’s pouring in, because in the end consumers basically wants cheap transportation,” said Don Walker, chief executive of parts supplier Magna, in a speech at the Detroit Auto Show.

“Ultimately, we need to be more efficient with the capital we deploy in the industry.”

But partnerships are often fraught with tension.

The alliance between Renault and Nissan is a case in point as the nearly two decade partnership has experienced rising tensions between the two companies, not helped by the dramatic arrest and incarceration in Tokyo of Carlos Ghosn, its chairman and chief executive.

When the two groups started to develop their first electric models, they wanted to collaborate as much as possible. But neither side’s engineering team wanted to cede ground, and the resulting cars had a small number of common parts.

Ford and VW were at pains to stress the health of their embryonic partnership.

“We trust each other,” said Jim Farley, Ford’s president of global markets.

A VW worker. The company will make vans for its US rival Ford © FT montage / Bloomberg

“The success of this alliance or partnership, these projects, is going to be based on how we actually work together.”

The only concrete plans are for Ford to make a commercial van and a pick-up truck for VW, and for VW to make a city van for Ford.

But in future talks, it seems there are no limits for possible future projects.

In an interview with the Financial Times, VW chief executive Herbert Diess ruled nothing out, from Ford gaining access to the vast pool of electric car materials that VW plans to purchase, to possible future work on jointly developing vehicles.

There have even been some “smaller discussions around the edges” on future vehicles but “nothing concrete”.

“It always has to be a case of give and take,” he said.

The problem is that, sooner or later, one side will run out of things to “give”.

This goes to the problem at the heart of alliances.

When two or more companies are in a give-and-take relationship, sooner or later one business emerges as the stronger partner, leading to resentment among the weaker partner.

“The idea that both sides win never lasts for long,” said one former member of the Renault-Nissan Alliance, a partnership that looks close to breaking point, as it is about to celebrate its 20th birthday this year, after the arrest of its leader Mr Ghosn.

The question with Ford and VW is whether VW will run out of things it wants from Ford before Ford runs out of things it wants from VW.

Analyst John Murphy at Bank of America Merrill Lynch said he thinks that “what’s good for VW may not be so good for Ford”, adding the US carmaker risks “giving access to the crown jewel” by offering to make pick-up trucks for VW.

He added: “I think there’s tremendous risk, based on an early read of this deal. It seems like Ford is bringing everything to the table and VW is bringing less. Ford opening the door on pick-ups is a mistake, they aren’t getting a lot in return.”

Significantly, the two companies both ruled out a full merger, or any changes in capital structure, possibly eyeing mistakes made in the past with memories of the disastrous tie-up between Daimler and Chrysler still fresh.

Once committed to a partnership, it can also be difficult to unravel. For example, Renault and Nissan, which own stakes in each other, will face an extremely difficult and costly task in unwinding their capital structure should they choose to break ties.

The idea of carmakers pooling resources for survival was reinvigorated in 2015 by Fiat Chrysler’s late former chief executive Sergio Marchionne, whose own merger of Fiat and Chrysler in 2009 was one of the industry’s rare success stories.

His presentation “Confessions of a Capital Junkie” became an industry shorthand for the rationale behind collaborations, arguing that carmakers should not all invest separately into technology that will become commoditised, such as electric vehicle systems.

His claims were also fuelled by FCA’s desire to find a partner or buyer for the debt-riddled company — a desire that proved unnecessary, with the business hitting its lofty financial targets last year.

Today, FCA falls into the bracket of mid-size carmakers that would still benefit from working with others. The group is developing self-driving systems with BMW, and commercial vehicles with PSA.

“I am open to all of these opportunities,” FCA chief executive Mike Manley told the Financial Times.

“They are not crucial to my survival — but they may be beneficial to it.

We know we have the strength to do all the things [in the new 2022 plan] as an independent company as long as we execute well.”

Another leading carmaker, General Motors of the US is working with Honda on several projects, from fuel cell development to autonomous vehicles, but like others, the groups have been reluctant to commit too closely. They have stopped short of calling the relationship an “alliance”.

GM’s chief executive Mary Barra said “integrity” was key to collaborations, which are subject to “twists and turns” when developing new technologies.“If there’s a situation of win-lose rather than win-win, it’s going to become exhausting.”

China Risks Real Hard Landing This Time

Beijing’s crackdown on shadow banking has gone overboard. Some backtracking looks necessary.

By Nathaniel Taplin

China’s economy is at risk of its long-feared “hard landing”—a rapid slowdown in growth that would hit employment hard and could trigger big problems in global debt and currency markets.

The reason isn’t, as the Trump administration would like to believe, the U.S.’s trade offensive. Instead, Beijing has overdone its own crackdown on nonbank “shadow finance”—without opening alternative channels for private-sector borrowers, who often struggle to obtain bank credit. As a result, Chinese credit growth has continued to decelerate, despite nine months of significant central bank easing. If it doesn’t turn back up soon, producer-price inflation could turn negative—causing big problems in the heavily indebted industrial sector.

The mushrooming of Chinese shadow banking was an unfortunate, but necessary, byproduct of a banking system that has grown more state dominated since 2010. Private companies account for about two-thirds of the economy but receive only about a third of net new lending. It’s little wonder they have turned increasingly to unofficial channels to get loans.

Last year’s shadow banking crackdown has therefore created a lending bottleneck. Even though banking-system liquidity is ample, state-owned banks still aren’t directing money to credit-hungry corporate borrowers, leaving it sloshing around the financial system instead. Turnover in China’s interbank lending market was 21% higher in the fourth quarter than a year earlier.

In past easing cycles, China’s central bank typically cut benchmark interest rates or reduced the amount of cash banks must hold in reserve, stoking a pickup in borrowing by companies and households a few months later. Not this time. Despite several big reserve ratio cuts and sharply lower benchmark interbank rates, growth in net nonfinancial fundraising had declined to 9.8% in December, its lowest in more than a decade.

Private sector borrowers can find it hard to get bank credit. Pictured, a shop owner waits for customers on the outskirts of Beijing, in 2017.
Private sector borrowers can find it hard to get bank credit. Pictured, a shop owner waits for customers on the outskirts of Beijing, in 2017. Photo: nicolas asfouri/Agence France-Presse/Getty Images 

In other words, in the past year, banking-system liquidity has risen by about a fifth, but net credit growth has fallen by about a third. The reason is clear. Shadow finance outstanding fell by a full 10% in 2018—by far the sharpest contraction on record.

Regulators realize they have a problem. They are now trotting out new central bank lending facilities to goad banks into extending credit to small enterprises. And the economy still has some cushions. Infrastructure investment is rising again. Consumers are struggling, but less than headlines would suggest.

Both of these bulwarks aren’t as strong as a couple of years ago—consumers are more indebted and a separate campaign against off-balance sheet infrastructure fundraising is still crimping investment. If the property market falls apart, China will be in serious trouble.

China’s inefficient financial system has long needed surgery. By excising the shadow banking system without a proper transplant to replace it, regulators risk killing the patient.

Venezuela’s Opposition Takes a Chance on Change

The Venezuelan government is no stranger to protests, but the latest wave promises to be different.

By Allison Fedirka

A new wave of protests is ripping through Venezuela. Members of the country’s population, having lived for years with hyperinflation, food shortages, violence and oppression, are taking to the streets today to try to oust President Nicolas Maduro. It’s a familiar scene – similar demonstrations have rocked Venezuela many times before. But compared with previous episodes of unrest, including mass protests in the spring of 2017 that seemed to portend a change, the current demonstrations are more organized and more sophisticated. In and beyond Venezuela, politicians, risk analysts, think tanks and ordinary citizens alike believe that the country’s opposition has a unique but fleeting opportunity to overthrow the Maduro government once and for all.
A More United Front
One factor setting the current protests apart from previous ones is the opposition’s level of cohesion. A lack of unity and organization has dogged the opposition in the past and kept it from effectively mobilizing against Maduro. This time around, though, the opposition has been planning for months and has strategically timed its protests. Demonstrating after Maduro’s inauguration for a second term and the National Assembly’s swearing-in earlier this month will give the opposition a chance to make a fresh start with a new leader, Juan Guaido, who became president of the parliament Jan. 5. In addition, the date the opposition chose for the protests – Jan. 23 – is the 61st anniversary of a civilian-military coup that ousted Marcos Perez Jimenez.

A week before the protests, opposition members of the National Assembly held town hall meetings in their jurisdictions to mobilize the local populations. (At least 328 municipalities held such meetings in the Caracas area alone.) During the events, they explained the protests’ goal – to effect a political transition in the country that would lead to free and open elections – and instructed the public on how to join. Universities across Venezuela also have banded together to encourage participation in the marches, and 22 different countries have planned to hold solidarity marches Jan. 23. All in all, the opposition has made a much more concerted effort to prepare for the current protests than it has for past events, including the 2017 demonstrations, which relied on social media to generate crowds that then lacked direction.

As part of its planning, the opposition has reached out to the Venezuelan military. The opposition Democratic Unity Roundtable, or MUD, has been calling on the security forces to join in its protests for weeks – a contrast to 2017, when it made an attempt to draw junior servicemen to the movement through a haphazard barrage of tweets. And this time, the MUD has made a personal as well as a political appeal, recognizing that members of the armed forces are suffering the same economic hardships that are afflicting civilian protesters. Guaido promised active military members amnesty under a new government in exchange for their support and framed the protests as an opportunity to unite with the rest of the country, rather than to divide the security forces. His wife joined the cause, too, seeking support from military spouses and families in a video. At the same time, retired members of the security apparatus have issued statements reminding the military that its job is to defend Venezuela, not necessarily its leaders. Compared with its previous attempts at an uprising, the opposition’s latest protest movement has taken a more sympathetic and inclusive view of the military, and it seems to be paying off: Dozens of members of the national guard were arrested Jan. 21 after attempting a mutiny.
International Support
The discontent in the military only added to organized campaigns that played out in the media to support the opposition. Since Maduro’s inauguration day, U.S. outlets such as The Washington Post and the Miami Herald have been publishing accounts from Venezuelan sources of cracks in the government. Stories of Venezuelan military officials fleeing the country and disavowing Maduro followed, along with an op-ed by Miami Herald columnist Andres Oppenheimer calling for change in Venezuela. In South America, meanwhile, a Colombian TV news channel broadcast footage of Venezuelan soldiers in Peru and Colombia denouncing Maduro and declaring their support for the protests. Social media, too, has given the international community a venue to boost the Venezuelan opposition. U.S. Sen. Marco Rubio has taken to Twitter to criticize the Maduro government, expressing support for the protests and for the arrested mutineers. President Donald Trump’s national security adviser, John Bolton, has also used Twitter to condemn the Venezuelan government. It’s part of an active campaign to bring attention to the protests – which differentiates them from those that occurred in 2017.

Furthermore, the U.S. support goes beyond tweets and news stories – a change for the Venezuelan opposition. The United States has long disapproved of Maduro, but until recently, it didn’t launch a concerted campaign for regime change, beyond making statements condemning the government and issuing sanctions against it. Today, by contrast, it’s clear that the U.S. is fully behind the Venezuelan opposition and ready to support a transitional government. Washington has redoubled its efforts to break the Maduro administration, intensifying its sanctions, repeatedly affirming its recognition of the National Assembly as Venezuela’s legitimate governing body, and coordinating its stance with Brazil and Colombia. In fact, U.S. Vice President Mike Pence, Colombian Vice President Marta Lucia Ramirez and former Colombian President Andres Pastrana Arango recently met with two leaders of the Venezuelan opposition.

Under mounting pressure, the Maduro government has responded as best it can. It suppressed the alleged mutiny in the national guard, for example, and the military has consistently rejected reports of dissent or chain of command problems. Community groups allied with the government, known as colectivos, have increased their presence on the streets, while Maduro’s supporters have called their own town hall meetings to counter those of the opposition. Still, the government’s opponents far outnumber its defenders. As the opposition puts its months of planning and organization to the test in today’s protests, the Maduro administration will be on the defensive, relying on security operations to maintain order and cling to power.