Shiller P/E Return Scenarios

[workathome]

Scenario _____________ Annual Return from Today (%)
Mean x 150% ________ 6.9%
Mean x 125% ________ 4.6%
Mean x 100% ________ 1.9%
Mean x 75% _________ -1.5%
Mean x 50% _________ -6%

I found this interesting. I understand people are saying, relative to treasuries, stocks are a great deal right now based on dividends, shareholder yield, etc. However the Shiller P/E puts it in a different light. It would seem the odds currently favor owning a 7 year treasury bond over buying SPY.

If I understand the situation currently, we also have a theoretical scenario where to keep the broad market afloat, treasury yields must stay down - a situation where the Fed appears trapped into currently policies.

So my (extremely amateur) theory is that the odds favor buying more short-term to intermediate bonds over purchasing more index/SPY at this time.

[thebbqguy]

Here's an article about it: http://blogs.marketwatch.com/thetell/20 ... -pe-ratio/

[workathome]

Here's an interesting article from Hussman discussing the exact same thing (just found it tonight, yay coincidence!)

http://www.hussmanfunds.com/wmc/wmc130930.htm

[workathome]

The May to October 2007 peak Shiller PE was ~27.5, which Asness’s chart puts at an average of 0.5 percent per annum for the decade. We’re at 14.4 percent total return since, which equates to about 2.9 percent per annum, and so the actual return has thus far outpaced the average return.

The March 2009 bottom Shiller PE was ~13.3, which Asness’s chart puts at an average of 9.1 percent per annum for the decade. We’re at 138.6 percent total return since, which equates to 23.7 percent per annum, and so again the actual return has thus far well outpaced the average return.

Before concluding based on those two points that the Shiller PE chronically underestimates returns, the caveat I would add is that we are mid-way through a market cycle, neither of those Shliler PE periods are complete (the March data point is ~4 years and 1 month old), and the Shiller PE is currently very elevated.

"But if you used the Shiller P/E you would have sold out in 1992 and missed the market since!"

In December 1992 the Shiller PE was 20.45. The average return from 20.45 according to Asness’s chart was 3.9 percent per annum for the subsequent decade. The annual total return for the S& 500 TR was 8 percent per annum for the period to November 2001, which was about ten months from the eventual bottom of the dot com bust in September 2002. Including that final date reduced annual returns to 2.5 percent, which is slightly below the average return. It’s roughly correct over longer periods (10 years +).

3.9 percent is not a signal to sell out, it’s a signal to anticipate 3.9 percent from the market. It makes it possible to compare the returns available to other opportunities, which might be better. For example, the ten-year treasury in late 1992 was ~7 percent.

http://greenbackd.com/2013/04/03/how-ac ... ting-tool/

[workathome]

Here's a much more sophisticated approach:

http://www.zerohedge.com/news/2013-07-2 ... -reversion

It would appear the military officer's decision is to keep a large cash position and continue value investing, because no-one-really-knows. Civilians still need to decide what to do though.