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Hey Jim,
Sounds rightThanks for confirming that neither the inflation-adjusted CAPE ratio nor the P/E ratio of the market can be used to say anything about future market returns during the next 3 years. There's no correlation with CAPE or P/E that you can take advantage of to time the market over time periods that are less than 3 years.
We also agree that if you look 10 years out, then recent history shows a correlation between high CAPE values and lower market returns. That's what Schiller claimed in his original paper, and the post-1996 market data do show that correlation, over multiple 10-year periods.
Where I think we disagree is whether or not this CAPE correlation has persisted throughout market history, starting from the 1900s.
We have 2 new studies that have just been done on CAPE where no consistent correlation was found using all 10-year periods throughout market history. One was by board member tedthedog, that I already referenced, where he said that were periods prior to 1996 where the R-squared correlation coefficient "fell off a cliff". See his post at
https://www.shrewdm.com/MB?pid=592241089 And then we have a new paper on CAPE by Leo Chan published last year that says:
"Attempts to time the stock market to make an above-average return is one of the most common practices among individual investors. Empirical evidence from behavioral finance suggests that investors who try to time the market often meet with disastrous outcomes.
I show that the correlation coefficient between the CAPE Ratio and forward excess returns is positive rather than negative, as suggested in Campbell and Shiller’s original paper. "
What he's saying is that he actually found periods where the relationship was the opposite! I.e., there were periods where high CAPE ratios were followed by high market returns, and other periods where low CAPE ratios led to low market returns.
Bottom line: CAPE cannot consistently forecast market returns over the next 10 years.
Please read Chan's paper at
https://www.mdpi.com/1911-8074/16/9/410#B5-jrfm-16... Thanks,
Mechinv
