Is A Period Of Low Stock Market Returns Ahead?

The Shiller PE Ratio, or the cyclically-adjusted price-earnings ratio, may be the most respected measure of stock market value.

In short, the Shiller PE is the price of the stock market divided by the average of ten years worth of earnings.  If the ratio is above the long-term average, the stock market is considered expensive.

Credit Suisse's Andrew Garthwaite compiled the annualized trailing 5-year returns based on certain levels of the Shiller PE. 

As expected, the lower the ratio, the better the returns.  But the relationship isn't exactly linear.

Here's Garthwaite's chart. 

At current elevated levels, the Shiller PE is signaling a period of low returns, below +5% annually.

Read more: http://www.businessinsider.com/chart-shiller-pe-returns-2013-1#ixzz2HQXyR0xZ

Country P/E Ratios and GDP Growth

Many investors use the PEG Ratio as a valuation tool these days because it puts a company's growth prospects into perspective along with the widely followed price to earnings ratio. The PEG ratio is the P/E Ratio over the Growth Rate, and a PEG of less than one is generally considered good.

In this regard, Bespoke created "PEG" ratios for a number of countries using the P/E ratio of each country's main equity market index along with 2010 estimated GDP growth rates. Just as with stocks, the lower the country PEG, the more attractive.

As shown, India has the best PEG out of the countries we analyzed. It has a P/E ratio of 26.19 and estimated 2010 GDP growth of 8%. While its P/E isn't as low as a lot of countries, its growth rate is very high. China ranks 2nd with a PEG of 3.66.

The U.S. ranks in the middle of the pack with a P/E of 24.53 and estimated GDP growth of 2.6%.

At the bottom of the list sits Switzerland, Italy, and the UK, while Australia, Japan, and Spain have negative PEGs due to either a negative P/E Ratio or negative estimated GDP growth.

Chart and analysis courtesy of Bespoke Investment Group

WSJ - Not Even the 1930s Was As Bad As The Decade of the 2000s

The U.S. stock market is wrapping up what is likely to be its worst decade ever.

In nearly 200 years of recorded stock-market history, NO calendar decade has seen such a dismal performance as the 2000s.

Investors would have been better off investing in pretty much anything else, from bonds to gold or even just stuffing money under a mattress.

Since the end of 1999, stocks traded on the New York Stock Exchange have lost an average of -0.5% a year thanks to the twin bear markets this decade.

The 1950s represented the best decade for stock-market returns.So what went wrong for the U.S. stock market?

For starters, it turned out that the old rules of valuation matter.

"We came into this decade horribly overpriced," said Jeremy Grantham, co-founder of money managers GMO LLC.

In late 1999, the stocks in the S&P 500 were trading at about an all-time high of 44 times earnings, based on Yale professor Robert Shiller's measure, which tracks prices compared with 10-year earnings and adjusts for inflation. That compares with a long-run average P/E ratio of about 16.

Buying at those kinds of values, "you'd better believe you're going to get dismal returns for a considerable chunk of time," said Mr. Grantham, whose firm predicted 10 years ago that the S&P 500 likely would lose nearly -2% a year in the 10 years through 2009.

Despite the woeful returns this decade, stocks today aren't a steal. The S&P is trading at a price-to-earnings ratio of about 20 on Mr. Shiller's measure.

Mr. Grantham thinks U.S. large-cap stocks are about +30% overpriced, which means returns should be about -30% less than their long-term average for the next seven years.

That means returns of just +1.6% a year before adding in inflation.

Similarities and Differences Between 1983 and 2009 @ WSJ.com

The table herein was showcased in the November 10, 2009, issue of the Wall Street Journal's "Ahead of the Street" column, which makes a rather discouraging
comparison between the market and economic climates that prevailed in 1983 and 2009. Both years were notable for deep recessions and extreme volatility.

Despite the fact that the unemployment rate is the same at 10.2%, the two stats that stand out in bold relief are that...

(1) the S&P 500's P/E ratio is twice as high (18.9) now as it was in 1983 (9.5)and

(2) In 1983 household debt as a percentage of disposable income was only 62% versus 122% today, nearly twice as high.

High P/E ratios tend to put a cap on the upside potential of  stock market rally.

High household debt threatens to dampen consumer spending and impair the convalescence of a crippled housing market that is currently on life support.