OH, WELL: Get Ready For Another Decade Of Crappy Stock Returns…It’s official: We’re screwed
Jan. 15, 2011
Well, it’s official. The stock market has now gotten so far ahead of itself that we’re set up for another decade of crappy returns.
How can we tell?
Because the best predictor of long-term stock returns (emphasis on long-term) is the valuation of stocks at the beginning of the period.
Specifically, when stocks are expensive at the beginning of the period, the long-term returns are likely to be crappy. And when stocks are cheap at the beginning of the period, the long-term returns are likely to be excellent.
A couple of years ago, at the depths of the financial crisis, when the world looked like it was headed to hell in a handbasket (or was already there), stocks were pretty cheap. Returns since then have been excellent.
Now, however, stocks are expensive.
With the S&P nearing 1,300, stocks are trading at a 24X PE, according to professor Robert Shiller’s cyclically-adjusted PE ratio (CAPE). This compares to a long-term average of about 16X. Thus, according to this measure (and several others), stocks are about 50% overvalued.