FYI: With the Shiller CAPE 10 ratio having risen above 34, more and more investors are becoming worried about both the outlook for future equity returns and the possibility of mean reversion in valuations, which could lead to a bear market.
The concern about future returns is justified by the fact that, while the academic research shows valuations are an extremely poor forecaster of stock returns in the short term, they are the best predictor of long-term returns. A CAPE 10 of 34 translates into a real-return forecast for U.S. stocks of just less than 3%. Add in 2 percentage points for expected inflation and you get a nominal return of about 5%, half the size of the historical return. Let’s look at some of the evidence.
Regards,
Ted
http://www.etf.com/sections/index-investor-corner/swedroe-seeing-valuations-clearly?nopaging=1
