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What Returns Investors Can Expect In The Long Term

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Stock forecasts for twelve months have next to no meaningfulness. However, long-term return expectations can be derived from the Shiller P/E ratio and the price/book value ratio. After that, US equity earnings will decline. Europe and the emerging markets offer significantly more potential.

Analysts usually use the economic development of a market to draw conclusions about the profit development of companies. From the resulting stock market valuation, they derive the short to medium-term price potential. But this approach is rarely crowned with success. Because the economic development can at best be roughly forecast, the profit development of internationally positioned companies is increasingly decoupled from the economy of the home country and the short to medium term profit growth correlates only very weakly with the stock market development.

In addition, unforeseeable events such as the current outbreak of the coronavirus, terrorist attacks, oil price shocks and changes in monetary policy have a much stronger impact on stock market events in the short to medium term than predictable fundamental data.

Long-term stock market forecasts are more promising

However, since share prices follow the earnings trend over the very long term, long-term return estimates based on fundamental valuation indicators such as the cyclically smoothed price-earnings ratio are much more promising. Scientists call this figure the Cyclically Adjusted Price-to-Earnings Ratio, or CAPE for short. For most investors, however, the designation Shiller KGV has established itself because the valuation indicator was developed by the Nobel laureate in business, Robert J. Shiller. There is a relatively strong statistical correlation between the Shiller P/E and future stock market returns. The same applies to the price-to-book value ratio (KBV).

The past shows that when equity markets were valued highly based on these key figures, the increases in value over the next ten to 15 years tended to be low. Conversely, investors achieved comparatively high returns on the stock markets on average when the two valuation indicators were at a low level.

What stock market returns can investors expect?

Assuming that the relationships of the past persist, long-term yield estimates for international stock markets can be derived on the basis of the current Shiller P/E and P/E ratio.  Investors who invest in the US market for the long term with high return expectations should therefore have good reasons for doing so, because such a development would- with a few exceptions- contradict more than 140 years of stock market experience. the past, periods with comparable valuations were followed by long-term increases in value of 7.1 percent annually after deducting inflation.

What are the uncertainties associated with these stock forecasts?

When making forecasts, it must be taken into account that these are based on mean values ​​from historical observation data and that the returns in the past sometimes varied widely around these mean values. The extent of the scatter and thus the accuracy of the predictions can be visualized using scenario analyzes. The S&P 500 as an example, the course of stock markets in the past with a valuation comparable to today over the following one to 15 years.

Few convincing arguments for a new era in the stock markets

At the same time, most of the arguments mentioned do not seem sustainable: it is questionable whether interest rates will remain at the level of early 2020 over a period of 10 to 15 years or whether share buybacks at overpriced prices will actually pay off for companies. In general, the arguments mentioned today do not sound any more convincing than those of past overvaluation phases. What is precise is that in the past 140 years all the plausible arguments for sustained higher valuations have turned out to be wrong: all overvaluation phases mark significant highs of the S&P 500. Investors who invested during these overvaluations usually posted real ones for 15 to 20 years Exchange rate losses.

Investors who, on the other hand, got involved in phases of low Shiller P/E ratios and pessimistic market sentiments were always able to enjoy above-average increases in value over the long term.

Hello, I have been working as an investment consultant and author for more than 20 years. I love what I do and I have enriched everyone around me. A lot of money is not important, the main thing is how you use the money.

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