Wednesday, November 19, 2008


Predicting the returns for an entire stock market are darn near impossible, and in the short-term I don't think you can do much more than guess. Over the longer-term, however, you can appeal to a bit of historical science to make a more educated guess. The simple conclusion is that when stocks are expensive, the markets future returns are low, and when they are cheap, the future returns are high.

The PE in the chart below is based on E being the average of ten years of trailing earnings, the idea being to average out the business cycle.

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