A recent report by Research Affiliates highlights the power of current equity valuations as harbingers of future returns.
Changing fortunes: The report notes that currently, as was the case in 1997 through 2003, U.S. stocks are priced at a cyclically adjusted price-to-earnings (CAPE) ratio more than double that of emerging markets equities.
Buying high? Investing in U.S. stocks at peak valuations between October 1997 through April 2003 produced an average 10-year real return of zero.
Buying low? Conversely, investing in EM stocks between 1997 and 2003 produced an average real return of 11%. The firm is forecasting a 1.1% annualized return (net of inflation) for U.S. equities and 7.9% for EM equities over the next decade.
Source: Research Affiliates
Compiled and designed by Timothy Pollard and Gregg A. Runburg