Oops, You Missed Your Chance, Stocks Back At Fair Value Again

Did you let the Wall Street Journal’s DOW 5000! cover scare you out of buying stocks back when they were cheap?  Too bad!  Now they’re almost back at fair value again.

Here are the latest asset class forecasts from GMO in Boston.  The firm uses a cyclically adjusted price earnings ratio similar to professor Robert Shiller’s to calculate the forecasts (earnings are “smoothed” over 5 or 10 years to mute the effect of the business cycle).  This method is far more predictive than a standard one-year PE, which is skewed by temporarily high or low profit margins (profit margins are low now, so PEs look astronomical).  These forecasts were as of March 31, and stocks are up significantly since then.

The good news, if you missed your chance, is that stocks are still priced to deliver a compelling return over the next decade–about 9%-10% per year (nominal).  GMO’s forecasts are adjusted for inflation, which the firm assumes will be 2.5%.  So you can feel OK about continuing to invest a steady amount in the market each month.

Of course, you could always gamble that the recent move is just a gigantic sucker’s rally and wait for stocks to drop again…

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