Authored by Lance Roberts via Real Investment Advice,
Sixteen years of above-average returns came mostly from rising valuations, and that is the one source that cannot be repeated from here.
Key Takeaways
- Since the end of 2009, the S&P 500 compounded at 14.34% a year, or 11.41% after inflation. The long-run real average since 1881 is 6.72%.
- Of that 11.41%, some 4.33 points a year came from nothing but the valuation multiple doubling.
- Across 146 years, 140 of the 164 starting months with a CAPE of 25 or higher produced a below-average next decade. The 24 exceptions all fall in 2014 to 2016.
- The highest CAPE ever to precede a decade this good was 26.95, in August 2016. Today's reading is 41.04.
In 2016, McKinsey warned that the "golden era" for investors had ended. Falling rates, fatter margins, and a rising multiple had done their work in creating above-average returns. Younger savers, the report said, would have to work seven more years or save nearly twice as much. Ben Carlson went back and graded that call this month. Since that spring, U.S. stocks have returned roughly 15% a year and more than tripled, European shares compounded near 10%, and a saver who took the advice and doubled their contributions now has a very comfortable problem. The call was wrong. Carlson's verdict is blunt and correct. Sometimes the three most useful words in this business are "I don't know."
"Strip the multiple
