Photo: Daily Ticker
Everybody knows Robert Shiller as the brilliant economist who predicted the dotcom bubble and then the housing bubble.In new interview with Money Magazine’s Penelope Wang, Shiller offers some bad news for stock market investors.
Citing his 10-year cyclically-adjusted price-earnings ratio (aka CAPE ratio aka Shiller PE), Shiller estimates that the expected long-run inflation adjusted return on the stock market is just 4 per cent.
But he warns that even he doubts the predictive power of his namesake ratio.
From Money Magazine:
A real 4% return seems like a worthwhile investment.
Then again, I don’t know that I trust that number. It goes back to this whole academic literature on the outperformance of equities.
My old friend Jeremy Siegel [Wharton professor and author of “Stocks for the Long Run”] makes the strongest claim about this. He has data going back 200 years showing that the market has had a real 7% return over that period.
But there’s no solid reason it should do so well. Things can go for 200 years and then change. I even worry about the 10-year P/E — even that relationship could break down. But I believe I’m on better ground thinking that the P/E forecasts returns than thinking one asset just always outperforms.
Are you saying that there’s no reason stocks should outperform bonds at all?
Oh, no. If you go back to textbook finance and make some assumptions about investors’ risk aversion and that assets should be priced to pay investors for added risk, you would get some outperformance for stocks. But not as much as it’s been; it looks as if past high returns were a historical anomaly.
So when I said the 10-year P/E predicts a 4% return, that’s conditional on past returns being a guide to future returns, and the truth is, we don’t know. Maybe it will be only 2%.