One Measure of Expected Returns

Chart above comes to us from the Research Affiliates website and shows us the 10-year expected risk and return outcomes using a measure of analysis known as the Shiller P/E.  Shiller P/E is a calculation popularized by Robert Shiller that divides real prices by an average of real earnings per share over the prior ten years.  As Research Affiliates points out this approach allows the P/E relationship to be viewed in the context of several business cycles and is supposedly not biased by recent events.  

Using Shiller analysis the US markets look expensive, trading right now at nearly 25 times earnings.  However, Shiller's earnings averages include right now the deep trough from the Great Recession and also are not adjusted for the extremely low level of interest rates world-wide.  Never-the-less, by this level of thinking US stocks are very expensive and should post very muted returns over the next ten years by this method of analysis.   I think if I often paint what I see is a more optimistic view of things going forward then it is only fair every once and awhile to show the opposite view.  Looking at the expected returns in Shiller though does show us that expected returns {as well as higher risk} has the potential to come from foreign markets.  This is why I think as long as they can stomach the risk of volatility, some portion of client's portfolios should be invested abroad.

We may come back and discuss Shiller in more depth at some point.  I'd be willing to take the side of the bet that says US equities return something more than the 1-2% shown above over the next 10 years.  I do think there's a real possibility that markets abroad do better than the US in the next few years.  However, I've also been saying that for what seems like forever!

Will be back posting on Monday.

*Long many of the represented countries above via ETFs in personal and client accounts.  Positions can change at any time though.