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

Valuations Hit 26-Year Low As Profits Surge And Stocks Languish

Companies in the S&P 500 Index will earn +18% more in 2011 than in 2010, according to a survey of 9,000 analysts, BUT stock prices are NOT reflecting that rate of growth. The S&P 500 has corrected since April 29 on concerns over China’s slowing economy, the potential Greek default and the end of the Federal Reserve’s $600 billion stimulus program.  Negative reports on housing, employment and manufacturing have also sent some investors to the sidelines. As a result, even if companies posted no growth in 2011, price-earnings ratios would be lower than on 96% of days in the past two decades, according to a Bloomberg analysis.

Why Market Risk May Be Higher Than You Think: Reason #1 of 5...

1. The stock market is already expensive. 

Stocks are about 20 times cyclically-adjusted earnings, according to data compiled by Yale University economics professor Robert Shiller. That's well above average, which, historically, has been about 16. This ratio has been a powerful predictor of long-term returns. Valuation is by far the most important issue for investors.

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.