[quote=FormerSanDiegan]Never thought I would see this day. Shiller claims stocks are roughly at fair value from a long-term earnings point of view. Now, he expects significant downside, but …
“If you buy now and wake up in 10 years, you’ll probably get a return around the historic average,” said Yale economist Robert Shiller.
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Yep, this makes sense. It mirrors what Jeremy Grantham has been saying recently.
If you start with a 3% dividend yield, normalize earnings and get 5% annualized earnings growth with a normalized P/E of 14-15, you wake up with an 8% annualized return on stocks over the next decade. This compares to the 10-Year Treasury yield of 4%. 400 bps of equity risk premium is as good as we’ve seen in 20 years.
I agree that stocks will head lower at some point, but if you’re looking out long term, the risk-return trade-off for stocks versus bonds is pretty good right now. That’s just the math speaking.