What Does the Shiller PE Ratio Say About Future Returns?

The Shiller PE ratio has been getting a good bit of play in the financial press recently so we thought we'd give an update on where things stand. The Shiller PE hit 25.4 yesterday as the S&P 500 briefly eclipsed 1800 on an intraday basis. This PE ratio has coincided with average annualized price returns of 1.6% over the subsequent 10 year period when considering all market regimes.



When just looking at periods when the stock market is in a structural bear market, the average annualized price return drops in half to just .7% over the next 10 years.



In this environment dividends and the reinvestment of those dividends account for the vast majority of total returns.



And for illustrative purposes, below is a scatter plot of subsequent 10 year returns and the Shiller Earnings Yield (1/PE), which while not perfect shows a good historical relationship between cyclically adjusted valuations and nominal returns.