I should point out that, in research done with Ed Easterling and shared in previous letters, we turned up 20-year periods when investors actually lost money (inflation-adjusted). So, the next time you go in for a tune-up of your financial-planning program, have them adjust your forward returns based on some of the data presented above and below. And then be prepared to exercise restraint when they show you the results. And then be determined to work longer and save more, because that’s what you may have to do.
The reality today is that hamburgers are expensive. You’ll need to be mentally prepared to play offense when P/Es eventually shift back down into quintiles 3, 2, and 1; but for now it’s time to play defense and think differently about your portfolio.
Use this next chart as a guide to help you determine which P/E quintile we’re in, going forward. We are clearly in the most expensive valuation quintile now:
Next, let’s next look at some other valuation measurements used by people who know what they’re talking about.
Shiller’s CAPE (cyclically adjusted P/E) – a measurement process that smoothes P/E over the last 10 years
The current Shiller’s CAPE P/E is 28.94, higher than at the market high in 2007, and higher than the bull market peak in 1966. Only 1929 and 2000 were higher.
Jeremy Grantham: GMO’s 7-Year Asset Class Real Return Forecast
Here’s how to read the chart: