Zero Interest Rates Mean Low Returns For Everything In The Future

Based on forward p/e ratios the market is not overvalued. Yet, this is due to record margins and very low labor share.  As a market historian said, profit margins are the most mean reverting historical data series we have. If they don’t revert, capitalism doesn’t work.   Also valuation measures are not short term timing models.  To wit: The irrational exuberance speech by Greenspan, Dec. 1996. If you look below you can see the models, at that time, were pointing to a fairly low expected future return, yet it took 6 years for markets to be reasonable again and it took over 10 years to be cheap again.  I have spent a quite a bit of energy on this over many years.  About all you can say, with a fair degree of confidence, is the total real return for stock prices over the next 7-10 years will be about -10%.  Nobody knows how we get there.

One way to offset market risk is to look for stocks that have a chance at being isolated from markets. The pickens are getting pretty slim.  Zero interest rates, in the end, mean low returns for everything.

Chart of Shiller p/e vs. future returns.
 Click to View
Or you can pick a model from Hussman’s charts
Jeremy Grantham (at GMO) who has been making 7 year forecasts for decades comes up with:

US Large: -1.1% to -1.6%
US Small: -4.5% to -5.1%
US High Quality: 2.7% to 2.1%
Intl Large: 1.5% to 1.0%
Intl Small: 0.7% to -0.1%
Emerging: 4.2% to 4.1%