[an error occurred while processing this directive]

John Hussman gave a talk recently where he presented the metrics he favors for projecting average equity market returns for the next 10 years. There are two basic models, one from Robert Shiller which uses a 10-year rolling average of P/E ratios (thus smoothing out boom/bust cycles), and another one that uses corporate market capitalization / GDP - a company valuation approach. Historically, both have performed relatively well in indicating on average what the equity market will do.

In the chart below, the blue line is the actual market return. The red & black lines are the different model's projections of what the average 10 year return should be. If you'd bought in 2000 and held 10 years, the model suggested you would likely lose money. And that's exactly what happened. Likewise, during the 1980s the model suggested if you'd bought stocks, you'd have done well, and that's what happened there as too.

One caveat. I believe the current forecast to be optimistic. These models don't account for the ending of a debt supercycle, the end of cheap oil, and the impact of the peaking of all sorts of different natural resources. You can find the explanation of the formula used in Hussman's article, look for the phrase ShillerPE.

sp500 returns chart

NYSE Margin Loans vs SP500

nyse margin chart