Predicted 10-Year returns from the Shiller P/E
A quick update on the Shiller P/E predictions–been a slew of articles/research on this recently:
We’ve written fairly extensively on the topic of predicting future returns:
Here is an article we wrote up describing Hussman’s model:
John Hussman has an interesting piece on predicting long-term market returns
The article is a bit dated (2005), but still fascinating.
In the short piece Hussman suggests that the projected annual total return on the S&P 500 over T years can be represented with the following equation:
- Long term total return = (1+g)(future PE / current PE)^(1/T) – 1 + dividend yield(current PE / future PE + 1) / 2
He makes the following assumptions and plugs them into the equation above:
- Peak to Peak earnings growth, g=6%
- T=10 years
- future PE (E=Peak Earnings over cycle) range between 20 (major bull) and 7 (major bear)
Here are the results of our analysis of this model:
Low-end prediction is -0.84% 10-Year CAGR; high-end prediction is 7.61% 10-Year CAGR
We also have a piece that is related to predicting 10-year returns with a simple regression model:
The model is predicting a 3.31% 10-Year CAGR.
Expect 10-year returns to fall in the -.84% to 7.61% range over the next 10-years. Not too precise, but at least you can scratch off your prior expectation of 20% CAGR…
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Definitions of common statistics used in our analysis are available here (towards the bottom)