In the equity market, at least since the 1980s, we know that the cyclically adjusted price - to - earnings (CAPE) ratio, as demonstrated by Robert Shiller, and the dividend yield are both good predictors of long -
term subsequent returns.
Not exact matches
While this comparison has captured certain periods of extreme overvaluation, it is a useless predictor, in
terms of its overall relationship with
subsequent market
returns.
The prevailing overvalued, overbought, and overbullish combination of conditions has historically been associated with
subsequent market
returns below Treasury bill yields, so while we hold about 1 % of assets in call options as a modest speculative exposure to market fluctuations, a larger exposure closer to 2 % continues to await a short -
term pullback sufficient to «clear» that overbought condition.
On the basis of valuation measures most tightly related to actual
subsequent long -
term market
returns, we also estimate that the S&P 500 is likely to be lower 12 years from now, compared with current levels, though dividend income may push the total
return just over zero on that horizon.
Looking back through history, whenever value stocks have gotten this cheap,
subsequent long -
term returns have generally been strong.3 From current depressed valuation levels, value stocks have in the past, on average, doubled over the next five years.4 Not that we necessarily expect
returns of this magnitude this time around, but based on the data and our six decades of experience investing through various market cycles, we believe the current risk / reward proposition is heavily skewed in favor of long -
term value investors.
It is more accurate to argue that following poor 10 - year
returns, provided that valuations are depressed based on normalized earnings and the economy is likely to grow at double digits rates of nominal growth - investors can probably anticipate higher
subsequent long -
term returns.
This data suggests that we should modify the assumption that poor past
returns, in and of themselves, reliably lead to strong
subsequent long -
term returns.
For example, market capitalization to GDP is a long -
term stock valuation indicator with a high correlation (0.89) to
subsequent 10 - year
returns.
But this «secular» argument for high valuations ultimately did not weaken the long -
term evidence and tight cyclical relationship between valuations and
subsequent market
returns.
Higher starting yields predict higher
subsequent long -
term returns.
Most academic research has shown short - sellers (represented by measures of short - interest) generate excess
returns over the medium to longer -
term, and some recent work ferrets out
subsequent news flow to posit they [shorts] possess informational advantage (better research?)
Kirk: I realize CAPE is not intended to be a short -
term indicator, but when stocks collapsed -55 % from the peak in 2009 before about tripling in the
subsequent five years, one would expect the medium
term (10 years) future
return outlook to imply above average
returns — not the case in 2009.
Investors who regularly make investment decisions based on raw short -
term returns will generally sabotage their long -
term investment results, because short -
term returns are unreliable (and often contrary) indicators of
subsequent performance.
It has a strong long -
term relationship to
subsequent 10 - year market
returns.
It would be more correct to say that 1880 represented the center of a wet spike lasting hardly a decade — a very short time in the life of an 11,000 year old glacier — and that the
subsequent drying represented a
return to «normal» conditions, as illustrated in the accompanying long
term lake - level graph from [Nicholson and Yin, 2001].
However, for
subsequent terms, the judge need only
return to the Judicial Nominating Commission for reappointment; neither the Governor nor the Senate plays a role.
involuntary measures should not be used except as a last resort and, in the event of any compulsory acquisition, strictly on the existing basis of just
terms compensation and, preferably, of
subsequent return of the affected land to the original owners on a leaseback system basis, as with many national parks.