News & Views

Negative Long Term Returns

Written on: February 2, 2018 | By Andrew Chorley |

US Equity Market 

We like to use the US market as a proxy for global equities and where they may heading – invariably most equity markets ultimately follow America. The availability of long term data also allows some interesting analysis; we use the Cyclically Adjusted Price Earnings Ratio or CAPE, this is the current price divided by the annual average earnings per share adjusted for inflation. Many of you know that we have mentioned this on many occasions before and the graph below shows how effective it is in establishing over or under valuation as we compare it to the next 7 years of returns – as you can see we current estimate returns of -1.74% per annum.

 

Returns can also be deconstructed to show how much may be expected from dividend income, growth in earnings per share and a reversion of the CAPE ratio to is long term average. The CAPE is at such high levels that it could have a big impact on future stock market returns; earnings growth is the long term average (this could however be lower as these are well above trend at present).

With interest rates at ultra-low levels we may however have to continue to play the investment game…….but very carefully!


On this day

1665 British forces captured New Amsterdam, the centre of the Dutch colony in North America. The trading settlement on the island of Manhattan was renamed New York in honour of the Duke of York, its new governor.

 

 
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