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You're right, I was getting sloppy.

My time period is 10 years.

"Risk free" means 10 year T-bonds at 5.1%, but if it was me, I'd use diversified investment-grade corporate debt. Vanguard's intermediate term fund has a 6.4% YTM on a 7.2 average maturity. I'll pretend default risk is negligible and call it 6.5% on 10 years just for the sake of argument.

I used the Wilshire 5000 so I could say "in aggregate" and not leave any worm holes. But I don't really benchmark to this index, so let's use the SPX at about 1100, with 1.5% dividend yield. Assuming the dividend yield remains constant, we need 5% in annualized capital gains to equal corporate debt.

That would give us SPX = 1800 in 10 years. If earnings bounced back to their pre-recession $50 and gained an additional 5% per year on top of that, we'd have $81 earnings in 10 years, for a PE of about 22. That doesn't seem unreasonable.

But it's going to take 30% earnings growth just to get back to where we were. I'm expecting a lot more special charges in Q4 2001, and I'm skeptical that a band of pundits who didn't see the recession coming in the first place can nevertheless see a recovery coming by Q3 2002.

At SPX < 1000, I'd have more equity exposure than I do. At SPX < 900 I might even be long the index. But at 1100 there just isn't enough reward there for me.

Todd

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