Shiller PE versus One-Year Market Performance
Shiller PE versus Average Five Year Market Performance
Shiller PE versus Average Twenty Year Market PerformanceThe graph average twenty year market performance shows a clear inverse relationship to Shiller PE. Eureka! The relationship is strong enough that it could be used for accurate quantitative prediction of average market performance over long periods. When stocks are cheap, as indicated by a Shiller PE in the range of 5 to 15, average market returns for the following 20 year are likely to be about 5 percent to 10 percent per year, after adjustment for inflation. When stocks are expensive, as indicated by a Shiller PE of 15 to 25, the average market return is likely to be less than 5 percent for the next twenty years. When the stocks are very expensive, with a Shiller PE greater than 25, the average stock market return for the next twenty years is likely to be near zero. The current Shiller PE is posted daily on Robert Shiller’s website, and is currently 25.9 (March 18, 2016).
Economic Research Division