A Look at Long-Term Stock Valuations

July 8, 2008

Rob Bennett emails to tell me about a handy little tool
he’s constructed, which looks at stock valuations and calculates what
kind of real return you can expect to get from investing in US equities
over the next decade or six. The tool is based on one of Robert
Shiller’s favorite indicators, P/E10, or price to previous ten years’
average earnings. Here’s how P/E10 evolved between 1881 and 2006:

Right now, P/E10 is at about 22, which mean that stocks are
expensive, by historical standards: Rob reckons that fair value, for
stocks, is about 14 or 15, and that anything above 20 is “truly
dangerous”:

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