Market Valuations

Newfound Research 2016 Market Valuations And Expected Returns [Slides]

Newfound Research 2016 Market Valuations And Expected Returns.

Long-Term Return Forecasts

Equity Valuations

Shiller Cyclically Adjusted Price-to-Earnings Ratio (“CAPE”): Price divided by 10-year average of earnings, adjusted for inflation.

Current ShillerCAPE is in 89th percentile of historical readings, implying that U.S. large-cap stocks are currently expensive.

Market Valuations

Equity Valuation Return Implications

Historically, valuations have been a strong predictor of long-term forward returns.

With a ShillerCAPE reading of 26.03, 10-year annualized real returns are expected to be 4.9%.

Market Valuations

Another Way Of Evaluating Returns

Total Return = Investment Yield + Speculative Re-Pricing

Investment Yield: Dividend Yield + Earnings Growth

Speculative: Price change pressures due to over- or undervaluations; e.g. “reversion to the mean” of P/E ratios

Other Experts On Equity Valuations

Market Valuations

Bond Valuations

10-Year U.S. Treasury rates sit near all-time lows.

Market Valuations

Bond Valuation Return Implications

Starting yields are a great predictor for ending returns in a constant maturity bond index.

At 2.2%, we can expect a 2.2% annualized return over the next decade from a constant maturity 10-year Treasury index. If we assume inflation is 2%, then this is a 0.2% real return.

Market Valuations

60/40 10-Year Real Return Forecast

Market Valuations

INVESTMENT IDEAS

Idea #1: Diversify Your Approach

Much like asset classes, different investment strategies will perform well in different market environments.

Diversifying across multiple strategies has historically increased risk-adjusted returns. Chasing the recent performance of the best performing strategies, on the other hand, has proven to be destructive to risk-adjusted returns.

Market Valuations

Idea #2: Actively Manage Risk

10-Year periods with poor returns tend to have a higher frequency and severity of drawdowns. A focus on reducing the impact of these drawdowns can help increase total return.

Market Valuations

Idea #3: Go Global

Valuations are the biggest drag on forward looking returns for U.S. equities.

Many foreign markets are much more fairly priced and offer higher expected returns.

Market Valuations

Idea #4: Pursue Alpha

Equity factor exposures have historically outperformed the broad market and are widely used by institutional investors to increase risk-adjusted returns. Accessing a diversified basket of factors can help smooth out short-term under-performance of a single factor allocation.

Market Valuations

Idea #5: Seek Higher Yields

One way to increase total return is to increase yield.

Market Valuations

See full Slides below.

LEAVE A COMMENT


Saved Articles
X
TextTExtLInkTextTExtLInk

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Congrats! Are you a smart person?

We have an exclusive targeted & limited time offer for being a sophisticated and loyal reader.

ValueWalkPremium is a website and newsletter on the latest industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today and get our exclusive content for 40% off. This is our second biggest discount ever!!

Use coupon code VIP20 or click on the button below

Limited time offer only ENDS 4/30/2020 or after the next 40 subscribers take advantage whichever comes first – please do not share this discount with others

 

0