Throwing caution to the wind has been very profitable – so far. But if history is any guide, there are many reasons for investors to consider taking a much more cautious stance.
How low? The following table summarizes the statistical midpoint of future returns over the next 5, 10, 15, and 20 years based on an ensemble of valuation metrics including the Q ratio, cyclically adjusted PE, aggregate corporate market capitalization to GNP, and long-term price residuals. Those wishing to explore the mechanics behind this analysis are invited to read the full report here. Those looking for a second, third, fourth or fifth opinion from other well known firms will find them here.
Source: Shiller (2013), DShort.com (2013), Chris Turner (2013), World Exchange Forum (2013), Federal Reserve (2013), Butler|Philbrick|Gordillo & Associates (2013)
If you read the report, you will note that the valuations metrics cited most often by analysts and commentators to suggest the market is cheap – price to current or forward earnings for example – have almost no statistical significance. It doesn’t matter at all whether these valuations suggest that markets are fairly priced; they carry no information about likely future stock market returns.