A quick update on the Shiller P/E predictions–been a slew of articles/research on this recently:

• CXO Advisory Summary
• http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2172164

We’ve written fairly extensively on the topic of predicting future returns:

Here is an article we wrote up describing Hussman’s model:

http://turnkeyanalyst.com/2011/11/long-term-market-return-projections/

John Hussman has an interesting piece on predicting long-term market returns

http://hussmanfunds.com/wmc/wmc050222.htm

The article is a bit dated (2005), but still fascinating.

In the short piece Hussman suggests that the projected annual total return on the S&P 500 over T years can be represented with the following equation:

• Long term total return = (1+g)(future PE / current PE)^(1/T) – 1 + dividend yield(current PE / future PE + 1) / 2

He makes the following assumptions and plugs them into the equation above:

Peak to Peak earnings growth, g=6%

T=10 years

future PE (E=Peak Earnings over cycle) range between 20 (major bull) and 7 (major bear)

Here are the results of our analysis of this model:

Low-end prediction is -0.84% 10-Year CAGR; high-end prediction is 7.61% 10-Year CAGR

We also have a piece that is related to predicting 10-year returns with a simple regression model:

http://turnkeyanalyst.com/2011/10/the-shiller-pe-ratio/

The model is predicting a 3.31% 10-Year CAGR.

Summary

Expect 10-year returns to fall in the -.84% to 7.61% range over the next 10-years. Not too precise, but at least you can scratch off your prior expectation of 20% CAGR…