Warning: Declaration of action_plugin_safefnrecode::register(Doku_Event_Handler &$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/safefnrecode/action.php on line 14

Warning: Declaration of action_plugin_blog::register(&$contr) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blog/action.php on line 0

Warning: Declaration of action_plugin_blockquote::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/blockquote/action.php on line 0

Warning: Declaration of action_plugin_include::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/include/action.php on line 0

Warning: Declaration of action_plugin_popularity::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/popularity/action.php on line 0

Warning: Declaration of action_plugin_redirect::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/redirect/action.php on line 0

Warning: Declaration of action_plugin_captcha::register(&$controller) should be compatible with DokuWiki_Action_Plugin::register($controller) in /home/public/dw/lib/plugins/captcha/action.php on line 0

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Range of stock market outcomes [ClearOnMoney]
Top

Site

About
Contact

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Sitemap

Profile

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Trace:
Range of stock market outcomes

Reference

Main
Updates
Schedule

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656

Warning: preg_replace(): The /e modifier is no longer supported, use preg_replace_callback instead in /home/public/dw/inc/auth.php on line 656
Commentary

Range of stock market outcomes

6 Apr 2010 by Jim Fickett.

Prieur du Plessis has calculated the range of likely returns when buying stocks at particular valuation levels, based on the Shiller's CAPE and historical stock market records. For the current valuation level, the expected 10 year returns range from -3.3% to +9.0%, with an average of +3.4%.

Jeremy Grantham of GMO and John Hussman of Hussman Funds are both highly disciplined investors who have provided solid money management and good returns. They both have objective valuation measures that suggest likely market returns, and then aim to make decisions based on those measures, rather than depending on their own feelings about the fundamentals or about sentiment.

This is an attractive approach but, at least when I have read their commentary, the projection was a single number, an average of possible outcomes. I always wanted to know the likely range. OK, so investing now might, on the basis of history, yield 6% returns over the next decade. How much risk is in that? Might the returns be 0? Negative? So I was very interested to see the following analysis from Prieur du Plessis at Investment Postcards from Cape Town, which was pointed out by Hussman.

du Plessis looks at the valuation of the market at purchase time, as measured by Robert Shiller's Cyclically Adjusted Price Earnings ratio (CAPE). For each of a set of narrow ranges for CAPE, he then looks at the range of total returns (capital and dividends) over the following 10 years. As he explains it:

the all-important question: does one’s entry level into the market, i.e. the valuation of the market at the time of investing, make a significant difference to subsequent investment returns?

In an attempt to cast light on this issue, my colleagues at Plexus Asset Management have updated a previous multi-year comparison of the price-earnings (PE) ratios of the S&P 500 Index (as a measure of stock valuations) and the forward real returns (considering total returns, i.e. capital movements plus dividends). The study covered the period from 1871 to March 2010 and used the S&P 500 (and its predecessors prior to 1957). In essence, PEs based on rolling average ten-year earnings were calculated and used together with ten-year forward real returns.

There are several variations on the results, and some nice charts, for which see the article. Here are some representative results:

CAPE at purchase Minimum return Maximum return Average
< 6 9.5% 20.0% 16.1%
6 & 7 1.8% 20.0% 12.7%
8 & 9 4.0% 18.8% 9.7%
10 & 11 0.4% 17.6% 9.3%
12 & 13 -4.2% 15.2% 6.3%
14 & 15 -4.6% 16.1% 6.3%
16 & 17 -4.0% 15.7% 6.1%
18 & 19 -2.6% 12.2% 5.0%
20 & 21 -3.3% 9.0% 3.4%
> 21 -5.9% 7.5% 1.3%

(The exact nature of the purchase range is not explained. Perhaps “6 & 7” means a range of real numbers that round to 6 or 7?)

I have highlighted the row of the table that is currently relevant. du Plessis comments about current conditions:

with the S&P 500 Index’s current ten-year normalized PE of 20.3 … investors should be aware of the fact that the market is by historical standards expensive. As far as the market in general is concerned, this argues for unexciting long-term returns, possibly a “muddle-through” trading range for quite a number of years to come.

… there is a distinct possibility of some negative returns off current price levels.