Relooking History with a new perspective

I was doing some financial research and came across an interesting phenomena. Unfortunately, I have no rational economic explanations for it. Therefore, it might one of those predictors that performs excellently in backtesting but to fail miserably going forward. Nonetheless, it might lead to something though.

This experiment was conducted under the scenario that if one were to buy the S&P500 and hold it there for the next ten years without selling. How well would the investor fare through companies' earnings and dividends without considering capital appreciation of the stock itself? Earnings risk premium tends to overstate performance (upper bound), whereas dividends risk premium usually understates performance (lower bound). The real performance usually lies in between the two.

It would be interesting to note that backward earnings premium is highly correlated to forward dividends risk premium. It has a correlationship of almost 90%. An astonishing predictor considering the fact that forward dividend risk premium are figures made with hindsight hence impossible to produce at that point in time. However, backward earnings premium is another different story altogether.

The results have shown that ever since 1977, investing has become a lot more harder than ever. Earnings risk premiums and dividend risk premiums have virtually collapsed, sometimes even negative. This runs against the prevailing notion that if one had bought stocks in the long bull market of 1990s and they would have earned quite substantially. In fact, most of the time, these people would be much better off if they had bought 10 year treasury bonds instead. This showed that most stocks between the late 1970s till the recent crisis were just plain overvalued.

Good news is that according to this indicator, stocks are fairly cheap even at current prices. This is in direct contrast of my qualitative analytical work. In a way, it could also be a defining moment, for the outcome would allow me to place more weightage on qualitative or quantitative factors in the future.