When GMO publishes something called a “7-Year Asset Class Forecast” we are not supposed to mistake it for an actual forecast. It is what a reasonable person should expect. When reality disagrees, it is reality that is unreasonable.
Their entire defense rests on assuming valuations will revert to some historical normal. What if the composition of the market, corporate profitability, and economics of the business have structurally changed?
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When the model works - brilliant forecasting. When it fails - it was never a forecast in the first place.



Bear in mind that viewing it as what a reasonable person should expect is my phrasing of how that sort of method should be used, not theirs. They simply call them forecasts.

But, with respect, I think that the objections come not from believing that their forecasts are useless, but from the fact that nobody wants to believe that low returns are in the offing. In 1998 they predicted ten year S&P returns of about -1%/year, and the actual result was about zero. Given that the average US investor was expecting 20%/year, that's a pretty good estimate.

It's not as if the method makes you a permabear either: In June 2009 they predicted 12.3%/year in the next seven years, and the actual result was 12.9%/year.

The problem many people have is that when the predicted returns are low, people just can't accept that, and assume that there has to be something wrong..."the structure of the market has changed" or some such nonsense. Denial, it ain't just a river in Egypt.

Nope, things are just expensive these days. Real returns from the future were pulled into the present, both by valuation multiples and debt bingeing, so we don't get those returns a second time.

With any stock price forecast, the result you get is critically depending on the luck of the draw at the end date. The price might be crashing precisely 7 years later, or soaring. That doesn't change the fact that it's pretty darned easy to estimate roughly what the return will be from now and ending on any future date that the market is neither unusually high nor unusually low. Starting now, the answer is clearly "somewhere between pretty negative and merely well below average".

Jim