Top decile. I don't buy it, unless you can post some proof.
I don't have a linkable source, sorry. The source is Cambridge Associates, which has an excellent database of historical market information. The data used goes back to 1920.
Anyway, PEs taken in isolation don't tell you much. You need to look at it as it relates to bond rates, because money finds its way to the best returns.
I strongly disagree. When you're looking for future market return, bond rates don't mean anything. Yes, higher rates can drive PE ratios down. That just provides opportunity. When you look at historical returns, the best returns are from low PE environments. It doesn't matter if high interest rates caused that low PE environment, the opportunity is still there.
Granted, PE isn't the end all. Low PE correlates OK to future market returns, but there are better indicators, if that's what you're looking for. The firm of Grantham Mayo Van Otterloo (GMO) does excellent statistical studies. Via Robert Shiller, they found that if you take 10 years of earnings after inflation and did a ratio of that to price, it was even a better indicator of future market returns.
For the best correlation to earnings, Tobin's Q (the replacement cost of the market) has worked best. When the market has been at its cheapest valuation (i.e. bottom 20%) using Tobin's Q, subsequent ten year returns have averaged 12.2%. When the market has been in the upper quintile, subsequent returns have averaged 1.2% annually. We're still in the upper quintile. |
