Tags: Brokamp | stock | Shiller | CAPE

Motley Fool's Brokamp: High Stock Valuations Don't Necessarily Mean Tiny Returns

By    |   Thursday, 02 October 2014 08:50 AM

The lofty valuations that stocks have recently reached don't automatically doom you to miniscule returns, says Robert Brokamp of The Motley Fool.

Robert Shiller's cyclically adjusted price-earnings (CAPE) ratio for the S&P 500 index, encompassing 10 years of earnings, now stands at 25.8. That trails only the levels of 1929, 2000 and 2007, market peaks that were followed by major plunges.

"That sounds ominous, but know that Shiller’s research indicates that the CAPE is highly correlated to the stock market’s return over the next 20 years — not the next year," Brokamp writes in an article for Time.

Some experts say the current reading implies future returns of only 1 to 5 percent, "But it doesn’t have to be that bad for you," he declares.

"Remember, the CAPE estimates of implied return is for the overall market, which is dominated by large-cap stocks. A few smart tweaks to your portfolio can make all the difference."

Adding small-cap stocks, foreign shares and some successful stock picks can help you do "a lot better," Brokamp writes. "Then keep your spending in check and your savings high."

Others aren't so sanguine.

"I'm nervous," Scott Clemons, chief investment strategist at Brown Brothers Harriman Private Bank, tells CNBC. "I think investors have had a holiday from volatility for almost two years, and that vacation's about over." The CBOE Volatility Index (VIX) fell to a seven-year low in June.

"The complacency in the market is one of the things that creates a fragility that could lead to an enhanced or exaggerated negative market reaction, on even a modest piece of negative news," Clemons adds.

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The lofty valuations that stocks have recently reached don't automatically doom you to miniscule returns, says Robert Brokamp of The Motley Fool.
Brokamp, stock, Shiller, CAPE
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2014-50-02
Thursday, 02 October 2014 08:50 AM
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