Prepare For Low Stock Returns, Here’s Why

Dec 3, 2022 | Uncategorized

Let’s cut right to the chase and start with how stock returns are generated. 

John Bogle in his book Common Sense on Mutual Funds states:

We can use the historical data to answer a simple question: Why have stocks provided long-term real returns of 7 percent? Answer. Almost entirely because of the rising earnings and dividends of U.S. corporations. (T)he total long-term real return on stocks derived from dividend yields and earnings is virtually identical to the 7 percent real return actually provided by the stock market itself. All other factors have an almost inconsequential impact on the returns provided by those two fundamental factors alone. (emphasis mine). 

Now you may want to argue that Bogle is incorrect and that speculation, i.e., price/earnings contraction or appreciation, play a significant role.  Be my guest. However, the facts are that any extended period of time P/E ratios are negligible in the returns of equities. 

So, we’ll just assume Bogle is right; quite the safe assumption given his track record. Thus your stocks will return to you the sum of your current dividend yield and future earnings growth. No more, no less. 

As of this writing, 12/3/2022, VOO, the Vanguard S&P 500 Index ETF is yielding 1.62%.  

You can see in the above chart the current dividend yield is well below historic norms. Remember the dividend yield is simply the actual dividends paid divided by current price. So for yields to get back to historic norms one of two things will need to happen: Companies greatly increase the dividends they pay, or stock prices drop…a lot. 

I don’t expect companies to greatly increase their dividend payouts especially given the double taxation of dividends. So the only way, I can see, for dividend yields to increase is by stock prices dropping. Let’s not hope for that.  Assuming not 50% decline in stock prices we can assume dividend yields will probably stay below 2% for many years to come. 

The second part of stock returns, and what has driven the market for the last 15 years or so, is earnings growth.  Earnings growth is nothing more than the increase in profits a company makes over time.  It’s not enough for a company to be profitable today, it needs to be profitable for the years to come. Profits need to increase to keep up with the cost of goods sold which are growing because of inflation.  If we look at VOO you can see their earnings growth rate over the past 5 years has been 19.6%. 

And, lo and behold, what do we see as the return on VOO? CAGR (compounded annual growth rate) was 18.40% annually.  My shocked face. So shocked…

You can attribute earnings growth to anything you possibly want, the “cheap money” from the Fed is usually what people say.  It matters not to me.  What matters though is that, once again, Bogle was right. Your stock returns will consist primarily of dividend yields and earnings growth. 

And that brings me to the crux of the matter.  If we know dividend yields will provide, say 2%, the rest of your returns must come from earnings growth.  And thus, the problem.  

Let’s start with this:

According to the Friedman view of traditional economics, only monetary policy drives inflation.  However, Friedman never lived in -nor fathomed- an era when the collective western governments would intentionally shrink the economy in order to save the planet via climate change. (emphasis mine).

“Shrink the economy”, eh? Oh wait, there’s more:

The scale of inflation is a direct outcome of the scale of energy price increase.  As long as energy prices remain high, regardless of the abundance of the commodity the price for the foodstuff will remain high.  Food inflation has nothing to do with food scarcity and everything to do with increases in the costs to produce food.

We are in a price plateau right now, waiting to see how much further energy production will be restricted.

This is what western political leaders call “managing the transition”.  Put another way, they are managing the overall decline of western civilization.

Now, you may be inclined to say this is just the ramblings of a crazy, right-winger named Sundance over at The Consevative Treehouse.  Maybe.  But how do you explain this then:

“The cheapest energy is the energy not used.”

I invite you to Google “climate change” and let me know what you come up with. Well, you don’t need to let me know because I already do.  Why? 

Melissa Fleming, UN under-secretary-general for global communications not a scientist mind you, said in a World Economic Forum conference that “we own the science”. “We” being the UN, and “the science” being climate change.  So what did she do with that ownership?

“We partnered with Google. For example, if you Google ‘climate change,’ you will, at the top of your search, you will get all kinds of UN resources” 

Folks, need I remind you that 80% of electricity is generated from fossil fuels and nuclear?  And that is just electricity, not the entirety of the energy you and I consume. Transportation?  How much of that is powered by electricity? Very, very little. 

And yet, even with our huge reliance on fossil fuels to power our economy, if we want to electrify more of our economy we’d inherently have to include nuclear. Yet, there has only been one, count ‘em -ONE, nuclear plant completed in the U.S. in the last 3 decades!  

Ironically, well idiotically, all the blue states and our esteemed President are passing laws to make us net-zero in the next two decades.  Do you possibly know what that means? 

You are NOT going to be net-zero in the economy we’reaccustomed to. It’s a literal impossibility.  And, of course, that’s just meeting today’s energy needs.  If we are to grow as an economy, we need reliable and a growing source of energy production. Yet we’re going the opposite direction, reducing our consumption by reducing our energy production. 

Just look at what’s happening in Europe right now.  Growth? Are you kidding me? They’re just trying to sustain themselves.  Growth is not on the agenda. 

Remember “the cheapest energy is energy that isn’t used.” I didn’t say that. The EU climate chief said that.  And the UN Secretary General himself said “fossil fuels are dead”. 

Here’s an idea from a German Prime Minister: Only heat one room in your house!

He wants us to go back to the old days because 

“Kretschmann himself had spent a childhood as a refugee child and explained that he was familiar with renunciation. Normal would have been a clammy bed, sleeping on straw mattresses and icicles at the window.”  

Be my guest, clownie, but I won’t join you if I can avoid it. I’m from Maine after all and while freezing may be normal for a kid growing up there in the 1970’s, I don’t want anything to do with it. But will it matter what we want?

“No normal person can afford to spend $30,000 for solar panels,” says energy analyst Max Gagliardi. “They can’t even afford bread, milk and meat at the grocery store right now. The ‘energy transition’ messaging is so out of touch at this point.”

The economic pressure on people in developing countries is even more serious. “Emerging and developing countries are most vulnerable to soaring energy prices,” says International Energy Agency Executive Director Fatih Birol. “Those who will be hit hardest include oil-importing nations in Africa, Asia and Latin America because of higher import prices and their weaker currencies.”

“We are in the middle of the first truly global energy crisis,” Birol said. “Our world has never ever witnessed an energy crisis with this depth and complexity.”

Our “leaders” are hell bent on sending most people back to the pre-industrial days of consumption but not them of course.

The best thing about wind farms, as far as city spivs are concerned, is that they transfer money from poor to rich. The costs are borne by electricity bill payers – and power absorbs twice as much of the monthly budget of a poor person than a rich person. The rewards are trousered by the wealthy: landowners, private equity investors, lobbyists, Chinese mine owners.

The problem is they are ALL in on it.  ALL of the elite. You think the Republicans are fighting this? Keep dreaming, bucko.  Just look at the funding for Ukraine, supported by most Republicans, to solidify Ukranian pensions and rebuild their infrastructure while we here in the U.S. are paying enormous energy costs. Makes sense only if this is part of the agenda, to get us to reduce consumption. Dollars are scarce. A dollar spent on an egg is inherently one less dollar than can be spent on vacation. Get it, yet?

It doesn’t really matter that the climate extremists at the moment control all of the commanding heights of our culture — the media, academia, most big corporations, and the Executive Branch of the government. What matters is that the cultists are proposing a new utopian energy system that will not work and cannot work. It’s only a question of when and how it fails — and of how big the political blowback will be when that happens.

You don’t possibly think the elites don’t know the “green” crap can’t work do you? Of course they know this!  It’s basic arithmetic. We can not have a growing economy powered on wind, solar and hydro. NetZero is the equivalent of us in the U.S. living like we did in the early 20th century.  Some travel. Some conspicuous consumption.  But only on occasion and for special circumstances. It’s what the elites want. And frankly there isn’t a whole lot you can do about it. By all means vote. Did your past votes stop this, though?  It’s the plan, amigos, to get westerners, who use the most resources, to reduce consumption.  

So, if we go back to the beginning of stock returns, we can see the formula: Stock Returns(SR) = Dividend Yield (DY) + Earnings Growth (EG).  SR=DY+EG 

You can’t have EG unless you have ECONOMIC growth.  Economic Growth is the enemy of the elites. And as such stock returns will suffer.  It’s basic math.