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050. What returns can we expect from the stock market?

As of 2/25/2016, the Total Market Capitalization is at $ 19779.4 billion, which is about 109.5% above the last reported GDP. The US stock market is positioned for an average annualized return of 1.5%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 2.15%.

Warren Buffet noted that the percentage of total market cap (TMC) relative to the US GNP is “probably the best single measure of where valuations stand at any given moment.”

The TMC/GNP ratio has varied within a very wide range. The lowest point was about 35% in the previous deep recession of 1982, while the highest point was 148% during the tech bubble in 2000. The market went from extremely undervalued in 1982 to extremely overvalued in 2000.

CONCLUSION: The market is currently significantly overvalued and its expected returns can be expected to be close to zero. This does not offer favorable investment opportunities.


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