No. of Recommendations: 16
"When we look at the relationship between the market's multiple and forward returns, it's nonexistent," Citi US equity strategy director Drew Pettit told Yahoo Finance. "The correlation between returns and PE is almost zero over the past 20 years."It's a great quote, but unfortunately it is completely contradicted by the actual data results. That's a problem for a lot of things you find in the financial press. So, other than being completely wrong, it's a great insight.
An example of actual results
http://www.datahelper.com/mi/search.phtml?nofool=y...One would be hard pressed to look at that table and conclude that market valuation levels don't have an effect on forward market returns.
Higher than average market valuation multiples reliably lead to poor forward returns in the medium term, and vice versa.
Rather unsurprisingly, I would think.
For market timing, valuation levels lie somewhere between terrible and completely useless. But they do represent an outstanding input for estimating medium to long run returns, and the main thing that anyone doing retirement planning should use.
As always, the discussion refers only to the returns from the broad cap-weight US equity market, or a portfolio that strongly resembles that.
If that isn't a good characterization of what you own, the conclusions aren't particularly relevant.
Jim
