Let's say 9.1% is the *upper* bound of reasonable returns from INDU (ex dividend) over the long term
and even that is probably overstating the case imho. because we are mixing dependent and independent variables (comparing total return since 1995 against the historical return since 1926, which should not really contain the period since 1995). ideally, we would compare the return from 1995 against the return from 1926 to 1994, because the entire historical return, which includes 95-present, has been skewed upward by the very period (95-present) we wish to isolate in comparison against "history".
so i would say 6% return ex-dividends is a reasonable expectation for the upper bound. given that assumption, and plugging into your equation, we have 1.06^8 (i.e., 1.5938) * 94MV. so 1.5938/2.63 * 10,000 = 6060.
about a 40% haircut.
of course, my favorite way is to figure based on expected return, which for the S&P would be a risk premium of X% over TIPS. with TIPS at 3.5%, a 5% premium would be 8.5% real return. adding current 1.5% dividend to 2% real growth gives me 3.5% current expected return on SPX (i.e., 0% risk premium over TIPS). to raise to 8.5% real expected return gives me a target on the S&P500 of a little over 450. about a 60% haircut.
to be a little more generous, one might assume only one-half the above 5% premium over TIPS (i.e., 2.5% premium), or an S&P500 Expected Real Return of 6% vs. today's ERR of 3.5%. in this case, i calculate about a 42% haircut to 643 on the S&P500. interestingly, this 42% haircut is pretty close to the haircut calculated above for the DOW based on your unrelated method of regressing the return since the end of 1994. always nice to see corroboration from different approaches!
of course, New Era thinkers might have some validity in their argument that the risk premium should be lower than in the past (i.e., NPV would be higher). so maybe 643 would be my target if i were anticipating more economic fallout (with attendant dividend and ERR reductions); or, if i expect a more steady state in the economy, i might raise the bar to 750 or so.
all of the above just my humble opinion. |
