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Norbert Keimling of Star Capital produced an excellent report in 2016 looking at cyclically adjusted price earnings ratios for 17 countries. Particularly interesting is the data on 10-15 year returns on shares following the time when the market was defined as having a high, medium or a low CAPE.
Today I’ll concentrate on the US market, and return to this paper to examine other markets in other Newsletters.
The figure shows the relationship between S&P 500 CAPE levels and subsequent average annual real returns over 10-15 years (it’s not clear whether the US performance data is for 10 or 15 years or something in between). It draws on 135 years of CAPEs to 2015.
Source: “Predicting Stock Market Returns Using the Shiller CAPE” www.starcapital.de/files/publikationen/Research_2016
The relationship seems clear: if the CAPE is below 10 subsequent annual real returns average over 10%. Then stock market returns deteriorate with higher CAPEs.
The chart below shows that on no occasions when the S&P 500 CAPE was below 10 did annual returns fall below positive 6% (yellow dots), whereas when the S&P CAPE is around 30 returns tend to hover at about zero…………………………….To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1.
