What do we see if we model TRCAPE’s effect on future on future reinvested inflation-adjusted S&P returns?
Data
Each point on the black line represents the expected annualized real S&P return on a purchase held for a given term. The slider updates the chart for different values of TRCAPE at purchase time.
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Maturity appears on the x-axis. This is the number of years an S&P investment is held. As the term increases, returns draw closer to the historical rate of around six percent after inflation.
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Annualized Real S&P Return appears on the y-axis. This is the expected annualized total after-inflation return of an S&P investment, including reinvested dividends, given a Term and TRCAPE.
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TRCAPE is adjusted with the slider.
Interpretation
- The chart is initially displayed for today’s TRCAPE.
- If you bought the S&P today and held it for a particular term, look on the y-axis to find your expected annualized return.
- Move the slider to the left to explore the historical effect of low TRCAPE values.
- In the short term, returns are higher than long-term values. Long returns approach historical long-term results.
- Move the slider to the right to explore the historical effect of high TRCAPE values (like recent ones).
- Returns are low for the first few years. These returns come mostly from dividends, comparatively unaffected by TRCAPE.
Background
In his paper Valuation Ratios and the Long-Run Stock Market Outlook, Shiller shows that dividends are less sensitive to valuations than earnings.
The data displayed on this page is modeled based on data sourced from U.S. Stock Markets 1871-Present and CAPE Ratio.