Future 10-Year Returns

Bob Kargenian was quoted in Barron’s last week in a letter to the editor:

“I was rereading the Sept. 14 interview with Joe Rosenberg (‘The Wisdom of a Nonconformist’), and I was struck by the contradiction in one of his comments. He said, ‘Equities over the past 15 years have generated meager returns. To those of us who believe in reversion to the mean, this suggests that the next 15 years will probably offer much higher returns.’

“The accompanying chart in the article showed that the trailing 15-year return of the Standard & Poor’s 500 is even lower than that at the end of 1974. Yet, in 1974, the Shiller price/earnings ratio, one of the better long-term valuation indicators, was below 10, suggesting strong, double-digit future 10-year returns. Today, the Shiller ratio is above 26, suggesting very poor future 10-year returns, at least until it goes down by 30% or more.”

You can view Bob’s comments here (A subscription to Barron’s is required to log in).