To: Lizzie Tudor who wrote (3524 ) 6/17/2002 2:03:02 PM From: MulhollandDrive Respond to i've been seeing the for rent sign wavers (probably laid off vp at some internet start up gone bust<g>)in marina del rey and a few other places...Message 17610472 sooner or later, the P/E ratio has tended to adjust back towards its long-run average. These adjustments have taken place mainly through changes in stock prices (P) rather than through changes in earnings (E).</b >While Campbell and Shiller do not expect a complete return of the P/E ratio to its long-run average, they predict poor returns from stocks in the coming years. The valuation model described here says something similar: we would not expect the P/E ratio to return to its long-run average because the bond yield and the volatility measures are now different from the past. Nevertheless, given the current earnings forecast, the model predicts a downward adjustment in stock prices. ptions and expectations about the future trajectory of earnings. Absent further changes in the P/E ratio, stock prices can rise only as fast as earnings. Since 1926, earnings have grown by an average compound rate of 5.8%. If we add to this figure the current dividend yield on stocks of about 1.2%, we obtain a forecasted total return on stocks of 7% per year--only about one-half the average compound return since 1982.
