Anticipating Future Stock Market Returns

Meb Faber summarizes a talk he recently gave about valuations and what they say about likely future returns. He doesn’t make forecasts. He looks at the probabilities of different scenarios and what the returns are likely to be in each of those scenarios. The outcomes aren’t very positive for investment positions taken today.

Historical returns in US stocks have been about 9% for reference.  So, if we stay at these lofty valuations for 10 years we get 6% returns.  If we go back to normal valuations for a low interest rate environment we get to 3.4%.  Not good but not as bad as bonds.  If we go back to full history normal valuations we get to 1.5%.  Similar to treasuries.  If we go to low valuations (where many foreign markets are today, well, you can see the red numbers.

Only if CAPE ratio expands can we get back to historical stock market returns.  The CAPE ratio has to go up to about 35(!) for us to get to historical stock levels.  Even if we go back to the highest bubble levels ever – where Elon Musk invents free energy and we all find out we’re living in a simulation – do we get 11.6% returns.  To get to the top level returns from the best 3 table?  Need to hit the biggest bubble ever ala Japan and get to a CAPE of 95.