Worth Reading: Another Extended Period of Dismal Returns?

American Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management, who wrote the following analysis of the markets on November 28, 2012. Do you agree or disagree with his sentiments? 

John Hussman wrote "If presently rich valuations were to retreat again to undervalued levels that have accompanied the start of secular bull markets, stocks would produce yet another extended period of dismal returns."

I've thought about this quite a bit over the past year, and I fail to see a way the stock market does not return to low valuations seen at the end of previous long-term bear markets. Demographics, debt levels, and reversion-to-mean tendencies simply will not support the rosy scenarios of growth most advisors assume. If so, that means a 10-year P/E at or below 10, possibly for a number of years. The impact for boomers and on pension plans will be stunningly negative.

No Hiding Places. Up to this point, the real loss from stocks could have been compensated by one's allocation to bonds. However, from this point forward, with the 10-year treasury yield at 1.65% and pension plan assumptions at 8%, it's highly likely both stocks and bonds will be a drag on a 50/50 portfolio's real return, and especially on expected (needed) rates-of-return. This reversion-to-the-mean, slow-growth dynamic, as it unfolds, seems likely to usher in the final exodus from "investing" by the boomers. It will also leave a scar on those in their 20's and 30's today, which will keep them out of the markets for some time.

Need For Patience. I honestly believe the only investors, even professionals, who will make it through this exodus intact will be those who are able to hold some real assets and cash, and have the patience to wait, with the 'patience' part being the most critical.

There will be plenty of opportunities to buy into the stock market for cyclical rallies, but most investors who try to trade will end up losing money because few have the patience to wait for good opportunities, while others will throw in the towel at precisely the wrong times. That's life in a secular bear market, and few understand bear market dynamics. Fewer still actually realize how stacked the odds are against a sustained advance and why that is precisely so. 

ADVISOR THINK TANK:  How should an inter-advisory team of professional financial advisors collaborate to manage wealth under this scenario in Canada? 

Visit Mike "Mish" Shedlock's blog Mish's Global Economic Trend Analysis and read more on this article here.