This post appeared originally on Forbes.com.
Heard this one from your broker? “Sure, there are problems out there, but the real question is whether you think the market will be higher or lower three years from now.” Most of us are optimists, so we buy.
OK, but the critical issue is really: how much higher? Charles Stucke, CIO of Guggenheim Investment Advisors, is out with some fascinating new research on that question. Spoiler alert: it signals disappointment for investors counting on strong equity returns over the next several years.
Before we start: I’m no fan of rigorously applying old formulas to new facts. The modern world is too complex –and rapidly evolving– for the patterns of the past to repeat themselves precisely. There simply is no precedent for the world’s largest economy being fueled by central bank liquidity experiments; as its second biggest tries to switch from centrally planned to a market driven; and its third largest falls into a demographic elevator shaft. Nor have we previously seen America as a great energy exporter, a development that will profoundly alter not only our economy, but many others. The wildcards are wilder than ever.
Nonetheless, Stucke’s take on two classic measurements of expected future yield for the stock market is illuminating. He drills down on what the Shiller PE and the equity risk premium are saying right now.
What’s the Shiller PE? Well, as you know, the standard S