The Prospects for the Market

By on March 22, 2010

Paul Lim, in the N. Y. Times, writes that in nine of the last 10 market recoveries going back to 1932, stocks gained ground in the second year after a bear market, according to research by Merrill Lynch.

Several market watchers are skeptical that the market can make major headway from here. They include Robert Shiller:

Robert J. Shiller, the Yale economist, calculates that the market’s price-to-earnings ratio is 20.6. That’s noticeably higher than the historical average of 16.

In periods when the market’s P/E ratio has been between 19 and 25, the average real return for stocks over the subsequent decade has been 3.8 percent after inflation, according to the Shiller research.

Assuming that inflation is around 3 percent, stocks are likely to return less than 7 percent, which is lower than their long-term historical gain of around 10 percent a year.

And Jeremy Grantham:

Going into this next decade, we start with the U.S. overpriced, so do not be conned into believing that every bad decade is followed by a good one.

And Robert Arnott:

When you combine moderately above-average stock prices with a vulnerable economic outlook, it’s hard to justify above-average P/E. That leaves me with a cautious outlook.

Source: N.Y. Times

One Comment

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    March 22, 2010 at 5:28 am

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