Valuations and long-term returns – an update
TheS&P 500 has now underperformed Treasury bills for nearly 9 years.This is a reminder that while valuations may not have much impact onshort-term returns, even for several years at a time, they are apowerful and reliable determinant of long-term investment returns.
Thisdisappointing long-term total return since the late 1990's is nosurprise, and is within a few percentage points of the low return thatvaluations indicated as probable at the time. As shown below (usingmethods that I've detailed frequently over the years) there have beenfew instances outside of the 1973-74 collapse and late 1990's bubblethat 7-year total returns have departed by more than a few percent fromwhat valuations would have dictated. Indeed, the only reason that totalreturns since 2000 have been positive at all is because valuations areback to historically rich levels (though not as extreme as in 2000).Even today, stocks are most probably priced to deliver only about 5%over the coming 7-year period.
