Hussman on investing - stocks going nowhere

Investment Analysis Clubs Macro Economic Trends and Risks
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"Likewise, if the possibility of a 10- to 20-year trip to nowhere for the S&P 500 Index seems preposterous, a bit of arithmetic may be useful. Over the past 10, 20, and 30 years, S&P 500 revenue growth has averaged less than 4% annually, including the impact of stock buybacks. Combining those two pieces of information, if the S&P 500 was simply to touch its historical valuation norms 20-years from today, without even breaking below those norms, the resulting average annual percentage change in the S&P 500 Index, measured from the recent bubble peak would be:

(1.04)(1/3.6)^(1/20)-1 = -2.45%

Adding expected dividend income would push that total return to roughly zero, but even 6% annual revenue growth would still leave the S&P 500 Index itself underwater. "

https://www.hussmanfunds.com/comment/mc220429/

A good read…but a bit scary…

t.

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If you’ve ignored Hussman’s advice over the past two decades, you’re likely wealthy enough to where future returns aren’t really a worry.

syke6 posted,

… if you invested $10,000 in his [Hussman’s] flagship Strategic Growth Fund upon inception in 2000, you would have $13,000 today.

On the other hand, if you invested $10,000 in VTSAX (Vanguard total stock market) you’d have $44,800 today. Even in the event of some future huge market catastrophe, you’d still be financially vastly better off by ignoring Hussman. But just for the sake of argument, let’s say you are super-risk adverse. That’s Hussman’s target audience, right? Yet $10,000 in VBTLX (total bond market) in 2000 would be $20,000 today.

Which begs the question. How often does a guy have to be wrong before people stop listening to him?

intercst

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The scary thing about what Hussman’s prediction for the future…

A note: If you had invested in Vanguard total bond with $10,000 in 2000…you’d be underwater by a big margin in 2022…inflation would have more than eaten your gain to $20,000 by now. You’d be at near zero gain. Your spending power would be equal to your investment in 2022.

IF his prediction for future growth comes true…and you get 2% real gains over inflation…let’s see …what would happen

  1. Every corporate and state pension fund would go bust. They depend upon a 8% over inflation market gain to have the funds to pay future retirement benefits. Worse for company pensions - federal tax laws require them to ‘top off’ their pension funds to be able to pay projected pensions ad infinitum. With 2% type market gains - all of them would quickly be insolvent after five years and bust after 10.

  2. The end of retirement? Most folks now don’t have pension plans…they went the way of the dinosaur mainly because of requirements in #1. Companies can have up and down years in profits and it’s hard to predict how much they need to top off the pension funds so they bailed out big time in the 1980s and 90s and converted to 401Ks. That works well in a rising market, but if gains are 2% over inflation - that means a LOT of people busy saving…and having only 2% gain for 10 or 20 years till they reach retirement age…won’t have anywhere near sufficient portfolios to provide any cushion beyond SS.

Now Hussman’s future is bleak - he is predicting NEGATIVE returns…but let us assume we have positive gains but only a few percent… and that future is not rosy either.

We’ve just had a ‘market bubble’…way off the peak. Some stocks down an incredible 70%!
And P/E ratios are still way out of whack.

So just what do folks think P/Es will go to? Historically they have been in the ‘teens’…now…

Look at the graph here on actual returns of the SP500 over the past 50 years. It might be an eye opener - it was done in 2020…but…we are back to that point now with the collapse of the stock market! …

https://www.hussmanfunds.com/comment/mc200130/

he notes:" As I’ve detailed before (and review below), the U.S. economy is presently running at a structural real GDP growth rate of only about 1.6%, reflecting the combination of demographic labor force growth and trend productivity. That’s the real economic growth that we would observe if the rate of unemployment was simply held constant at current lows indefinitely.

Add 2% inflation, and you’re up to 3.6% nominal growth (which is also the nominal growth rate of S&P 500 revenues over the past two decades). Add a 2% dividend yield, and we can estimate – assuming that market valuations remain at current extremes forever – the S&P 500 would achieve total returns averaging 5.6% annually."

But take out the 2% inflation (your bucks are worth less with inflation) and your real gain is 3.6% over inflation…and that assumes you are re-investing your dividends likely.

Again…a lot of ‘retirements’ are going to be put on hold or end in disaster…and a lot of state and corporate pension plans are going bust in the future.

Vanguard’s prediction

"Our 10-year, annualized, nominal return projections are shown below. The shaded asterisked figures(*) reflect a February 28, 2022, running of the Vanguard Capital Markets Model® (VCMM) for broad equity and fixed income asset classes only. Outlooks for the remaining sub-asset classes reflect a December 31, 2021, running of the VCMM.

Equities Return projection
U.S. equities* 2.8%–4.8%"

“Vanguard continues to foresee GDP growth around 3.5% in the United States in 2022, though oil prices and geopolitical risks from the Ukraine crisis bear watching.”

that’s 3.5%…but with 2% inflation (at best)…that’s only 1.5% real growth…and if inflation worse…might eat up all the real gain or make in negative…

https://advisors.vanguard.com/insights/article/marketperspec…

t

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Over the past 10, 20, and 30 years, S&P 500 revenue growth has averaged less than 4% annually, including the impact of stock buybacks.

Can anyone explain to me what the impact of stock buybacks by a company are on revenue growth for that company? I’ve been thinking about it and I can’t figure it out. If a company has $1B in revenue and grows that to 1.5B in revenue, does it make a difference if they have 10M shares outstanding or 9M shares outstanding (having bought back 1M shares using retained earnings)?

Maybe it’s some arcane GAAP accounting thing?

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Can anyone explain to me what the impact of stock buybacks by a company are on revenue growth for that company? I’ve been thinking about it and I can’t figure it out. If a company has $1B in revenue and grows that to 1.5B in revenue, does it make a difference if they have 10M shares outstanding or 9M shares outstanding (having bought back 1M shares using retained earnings)?

Stock buybacks increase revenue growth, per share, not revenue growth in total. Employee stock as compensation reduces revenue growth both in total, and per share.

Of course, employee stock as compensation is more popular when there’s no revenue.

intercst

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Stock buybacks increase revenue growth, per share, not revenue growth in total.

I’ve looked at a fair number of income statements over the years, and cash flow statements, and even balance sheets (that are often incomprehensible), but I can’t recall seeing “revenue growth per share”. I don’t even know what that would mean in the first place, since revenue growth is a percentage … as in “we increased revenue by 9%, and we increased EBITDA by 11%, and we increased free cash flow by 7%” or similar. The main thing that is usually expressed as “per share” is earnings (and dividends of course). And that’s why many companies like buying back shares because it makes earnings look higher because they are expressed per share.

So again, if a company grows revenue by $500M or 50%, or whatever, if they also bought back shares during that period, how does that share buyback affect the revenue growth in any way, shape, or form?

Employee stock as compensation reduces revenue growth both in total, and per share.

How does employee stock grants or options affect revenue growth? If a company sells 50% more stuff, then their revenue (more or less, since revenue doesn’t always include all sales, but assume a non-financial company that sells stuff here) goes up by 50%. If during that period they give out a bunch of stock to employees, how does that change that 50% growth in revenue?

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Stock buybacks increase revenue growth, per share,

Buybacks also, and more importantly, increase earnings per share. The growing EPS will tend to increase stock price, which increases “shareholder return”.

Somewhere in the late 80s, I was thumbing through my latest Tandy Corp report, and noticed that, while their net profit had fallen for the quarter, they had bought back enough stock, in that quarter, that EPS went up.

Steve

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How does employee stock grants or options affect revenue growth?

As long as you’re looking at total revenue, it doesn’t.

That’s the reason people want to see the fully-diluted, per share numbers. Employee stock is “free” until it starts to increase the divisor on the “per share” results.

intercst

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Over the past 10, 20, and 30 years, S&P 500 revenue growth has averaged less than 4% annually, including the impact of stock buybacks.

Can anyone explain to me what the impact of stock buybacks by a company are on revenue growth for that company? I’ve been thinking about it and I can’t figure it out. If a company has $1B in revenue and grows that to 1.5B in revenue, does it make a difference if they have 10M shares outstanding or 9M shares outstanding (having bought back 1M shares using retained earnings)?

You’re exactly right. The impact on revenue overall is zero. It is the same revenue over fewer shares. Hussman should know that.

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As long as you’re looking at total revenue, it doesn’t.

What else is there besides total revenue??? When you calculate revenue growth, you take last year’s revenue, subtract it from this year’s revenue, and then take that result and divide by last year’s revenue. That expressed as a percentage is “revenue growth”.

That’s the reason people want to see the fully-diluted, per share numbers. Employee stock is “free” until it starts to increase the divisor on the “per share” results.

Yes. This is well understood. Issuing shares causes lower per share earnings numbers. Buying back shares causes higher per share earnings numbers. BUT NEITHER ONE AFFECTS REVENUE GROWTH. The initial question is why did Hussman bring up “revenue growth” in this context? That is what I am trying to understand.

It could be that I’m misunderstanding the whole thing and he was talking about something else altogether.

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Can anyone explain to me what the impact of stock buybacks by a company are on revenue growth for that company? I’ve been thinking about it and I can’t figure it out.

The impact is very important. It is a management signaling. As I say this remember it is a window in time and other policy decisions can be quite different for a corporation down the line.

Finance books discuss stock buybacks and dividends as a management decision to allocate capital to shareholders when other options for a good or better return have been exhausted. Meaning management does not see investing in the business as a great option. This signal of course is critical to revenue growth expectations. Growth can still be expected in many cases because of ongoing operations. This is not a strict either or. This is some of the money being best sent back to the investors.

If you get into the guts of where revenues are derived by a corporation you see a wise use of capital or a poor use of capital. The justifications are therein.