Tags: CAPE | stocks | ratio | market

Study: US Stocks Might Drop 30 Percent in Next 5 Years

By Dan Weil   |  

The history of Robert Shiller's cyclically adjusted price-earnings (CAPE) ratio points to a 30 percent drop for stocks over the next five years, according to a recent study by two analysts at Swiss investment consulting firm Wellershoff & Partners published by the Social Science Research Network.

The CAPE ratio, which utilizes the average of 10 years of earnings, now stands at 26.5, the fourth highest level since 1881, and well above the average of 16.6 since then.

The Wellershoff study, going back to 1900, found that the stock market on average has lost 30 to 35 percent in the five years following periods when the CAPE ratio reached recent levels.

Editor’s Note:
Retire 10 Years Earlier With These 4 Stocks


"There has been only one instance when the valuation levels we see today were not followed by drawdowns [declines] of 15 percent or more over the subsequent five to six years," the report states.

"Thus it seems fair to say that the risk of losing capital is substantial."

To be sure, Shiller writes in The New York Times, "the [CAPE] ratio has been a very imprecise timing indicator. It’s been relatively high — above 20 — for almost all the last 20 years, with the exception of 20 months."

Of course the market did plunge in 2000-02 and 2008-09, but the drops weren't lasting.

Meanwhile, Scott Krisiloff, chief investment officer of Avondale Asset Management, provides compelling evidence backing those who think stocks will rise during the remainder of 2014.

"Since 1950, the S&P 500 has been positive through August 42 times," he writes on the firm's website. "The market has continued to rise in all but eight of those years. The average increase between September and year-end has been 3.9 percent."

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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The history of Robert Shiller's cyclically adjusted price-earnings (CAPE) ratio points to a 30 percent drop for stocks over the next five years, according to a recent study by two analysts at Swiss investment consulting firm Wellershoff & Partners published by the Social Science Research Network.
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