Unexpectedly Intriguing!
17 October 2005

John Hussman, the PhD manager of the Hussman Strategic Growth Fund (HSGFX), writes a weekly market commentary for his fund (HT: Moneywise at The Real Returns). His August 29, 2005 commentary offered a bold prediction: a 40-year forecast for the S&P 500 Index:

I've gone ahead and calculated the long-duration forecast for the S&P 500 versus its actual total return for every period since the late 1930's. Even for very long horizons, the projection performs well, generally within 2% of the true annual return. Notice that the horizon of each forecast is simply the duration of stocks at the time, so what you're seeing on the chart are forecasts that have ranged from less than 20 years to more than 60 years in duration (the longest-duration one, unfortunately, being the one at the 2000 market peak). At present, we've got a projected long-term total return for the S&P 500 of about 7.8% annually for a probable duration of about 40 years, even making the fairly optimistic assumption that the market's P/E multiple will not contract in the future.

This sounds like he did quite a bit of work, but sadly, work that was wholly unnecessary if he would have just simply assumed that the next 40 years for the S&P 500 Index would look like its last 105 years. Here's Political Calculations' chart showing the extremes of the rates of return for the S&P 500 Index for holding periods ranging from 1 to 105 years, along with the average rates of return for each of these holding periods from 1900 through 2004, which shows the average approximate rate of return for just about every holding period to be, drum roll please, 7.8% when rounded to one decimal place:

S&P 500 Average and Extreme Returns for Various Holding Periods

The bottom line? Predicting an average annual return of 7.8% in the S&P 500 Index over the next 40 years might appear to be a bold prediction, but in reality, is not exactly going out on a limb. Those considering investments in the HSGFX fund might like to take that into consideration in evaluating Hussman's money management prowess.

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