Barry Ritholtz reminds me again of the folly of predictions. On one hand,
[the] bears have been saying for some time now that stocks are at best fully valued, meaning there isn’t much room for gains after equities more than tripled from their March 2009 lows. The ursine argument is that low future returns are a given, and an ugly crash is the worst-case scenario.
The bulls argue that ultralow inflation allows for higher valuation metrics based on price-earnings ratios or Shiller’s CAPE (cyclically adjusted P/E). Compared with all historic medians, these measures are rather high. But compared with similar eras of very low rates and very low inflation, they are quite reasonable.
The chart below gives a series of S&P 500 forecasts based on current indicators.
Barry drove home the key message best:
…I have found that many investors focus on the implied 10-year annualized returns, rather than upon the range embodied by the 90 percent confidence interval.
Focusing on a range allows us to recognize that several factors remain unknown at present. These are crucial in determining future equity valuations.
Thara — It is easy to focus on a specific number as the expected outcome. However, when dealing with uncertain future, it is worth remembering that there are a range of possible outcomes, and we should make decision based on probability of each outcome.