By Louis P. Stanasolovich, CFP^®

Two charts that were recently published by John Hussman of the Hussman Funds in his Weekly Market Comment publication on December 6, 2010 portray a mediocre outlook for S&P 500 for the long-term.

The first chart is a chart of projected returns for the S&P 500 for the next 10 years. The second chart provides projected returns for the next 17 years. Each point on the blue line indicates the forecasted return for the applicable period going forward using a blended average of Price-Earnings Ratios utilizing Forecasted Operating Earnings (FOE), Normalized Earnings (Ex. 10-year normalized or average earnings), and various Dividend Yield Models. Any point on the red line represents the actual return of the S&P 500 for the next 10 and 17 years respectively from the point chosen going forward. Please note that the red line ends on the 10-year chart just shy of the last years because the last 10 years are not finished as of the date of the chart. The same facts are true for the 17-year chart except the periods reflect a 17-year timeframe.

Utilizing the scale on the left of each chart and the aforementioned valuation techniques from the right-most-point on the blue line, will forecast the return for the next 10 and 17 years respectively. This currently indicates a 3.7% compounded return for the shorter period and 5.5% compounded return for the longer period. Hardly awe-inspiring!

What’s the problem? Two issues: P/E’s using virtually any type of long-term valuation method are at 20 or more, which is simply too high to beget high returns. The second issue is that the dividend yield of the S&P 500 is at 1.8%. This is 2.5% below the long-term average of 4.3%.

Since 1940, actual returns have rarely strayed too far from the forecasted returns. The lone exceptions were the 1940s on the upside, the mid-1960s on the downside and the 1990s again on the upside.

Given the economic quagmire that we are presently in, with the strong likelihood of long-term Gross Domestic Product (GDP) growth that will probably not exceed very low single digits, coupled with the high valuations of the stock market and historically low dividend yields, we are hard-pressed to argue for a more upbeat return forecast for the S&P 500 than the ones depicted in the charts accompanying this article. After all the models used, of which there were several, it comes down to simple mathematics.

Mr. Stanasolovich is the founder, CCO, CEO, and President of Legend Financial Advisors, Inc.^® (Legend) and EmergingWealth Investment Management, Inc. He can be reached at (412) 635-9210 or legend@legend-financial.com.