No. of Recommendations: 2
"This is what I refer to as cycling about the mean rather than reverting to the mean."
To be sure, the PE is being pulled toward the mean; it just overshoots.
This is the same as many things in nature. A simple example is a ball hanging from a string. The ball is being pulled toward the center, i.e., vertical. However if it is displaced from vertical, it overshoots vertical as it returns.
GMO has a good forecast record for stock returns by assuming reversion to the mean. However the PE and return data since 1871 show that the GMO would have a better forecast if they forecast cycling about the mean rather than reverting to the mean.
