A Powerful Model for Projecting Stock Returns

You should know that I read all the comments about my articles posted on the Money and Markets site. Your input helps me understand what’s important to you and helps guide me in creating content that’s valuable to you as I consider future articles.

In response to last week’s submission, where I pointed out the disconnect between the Wall Street analysts’ consensus estimate of earnings growth this year as compared with the world’s best economists’ views of this year’s GDP growth, Jerry posted the following:

Your analysis of the markets is straightforward and easy to digest. The data that you provide is very useful for the average investor. Keep up the good work. Thanks.

Jerry’s spot on, I write these articles to keep it simple for the everyday investor so you protect and grow your nest egg, not as ivory-tower treatises for my snooty colleagues on Wall Street.

That’s because, as I pointed out in my March 24, 2017 Money and Markets article, it was the great investor John Bogle of Vanguard Group fame, who introduced me to the centuries-old wisdom of Occam’s Razor which says: The simpler the solution, the more likely it is to be correct.

And John’s advice has enabled me to make a lot of money for my private clients over the years.

Wall Street has a long history of creating schemes designed to separate unwitting investors from their money.

That’s because as a 30-year Wall Street veteran – I know that Wall Street has a long history of creating schemes cloaked in complexity – primarily for the purpose of separating unwitting investors from their money. So getting down to the essence of things can help you turn the tables on the big boys and can give you a distinct advantage over everyone else.

That’s why – inspired by Jerry’s comments and John’s guidance – I am now going to introduce you to another simple, yet powerful and elegant model for dissecting the stock market. And better yet, for projecting future stock market returns — that no one in the mainstream media, on the Internet, or probably your own financial adviser is telling you about.

This model can clear away the complexity surrounding the stock market and consequently lead to great financial reward. And, yes, you can use it to project future returns on the stock market as well as individual stocks.

Applied properly, it’s a real money maker!

In a perfect world, you want a stock forecasting model that is easy-to-understand, accurate and complete. And that’s what we have here.

So without further ado, here it is…

There are three – that’s right, only three — factors that determine the returns from stocks. And they are:

1. Beginning Dividend Yield.

2. Earnings Growth Rate (Annual % change in Earnings-Per-Share).

3. Revaluation (Annual % Change in Price-to-Earnings Ratio).

All three factors are expressed as a percentage, and best of all, you simply add up the factors – and presto – out pops the total return for the stock market as a whole or for an individual stock.

What’s this model telling us now?

Referring back to my article last week, if you believe the Wall Street analysts, stock returns for 2017 will look something like this:

That’s because the Trump administration’s plan to jumpstart the U.S. economy, with its Four Trump Cards that I told you about in my January 20, Money and Markets article, is hitting on all cylinders and the reflation trade in back on.

On the other hand, it you think the World Bank’s, International Monetary Fund’s and our very own Federal Reserve’s economists have it right, then here’s a reasonable estimate of this year’s stock market returns.

That’s because, in this scenario, global deflationary pressures win out and earnings-growth projections come in at a very disappointing level.

It’s the Battle of the Financial World’s Titans: Analysts versus Economists.

If you are with the analysts, then buy the ETF QQQ or its leveraged cousin QLD (for supercharged returns) because growth will rule the day and the stock market will soar.

If you are like me and you side with the economists – at least in the short run – then get your stock market hedges on and buy the ETFs TLT and GLD because when earnings undershoot, it will be “look-out-below” for the stock market – although I expect that period to be brief.

As the Captain of the Safe Money ship, my job is to avoid the wipeout so that my subscribers can protect and grow their wealth.

And, in the current environment, there is more downside risk in the financial markets than the potential for an upside surprise. That’s why I continue to have the hedges on in the Safe Money Portfolio while maintaining a core position in 12 carefully selected best-of-breed growth stocks – each with the potential to earn double-digit returns this year.

Next Friday, I’ll explain in more detail how you can use the simple and robust three-factor model I’ve shared with you today to make your own projections for the stock market as well as individual stocks.

Specifically, I’ll pull back the curtain and show you how to estimate the mysterious third factor of our three-factor model, Revaluation. Plus, I’ll explain why the first factor, Beginning Dividend Yield, is known before we even start to make our projections.

Best wishes,

Bill Hall

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Bill Hall is the editor of the Safe Money Report. He is a Certified Public Accountant (CPA), Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP). Besides his editorial duties with Weiss Research, Bill is the managing director of Plimsoll Mark Capital, a firm that provides financial, tax and investment advice to wealthy families all over the world.