Let’s look at the Shiller Price-to-Earnings ratio, commonly called the Shiller P/E ratio. This is an equity valuation that divides the market price per share by the earnings per share. Here's a chart from GuruFocus.com, looking at the ratio.
At the time of this writing, the Shiller P/E ratio is 23.6 (the red line), which is higher than the average of 16.49 (the gray line). What does that mean? Company stock prices are high compared to company earnings.
Global investment companies like PIMCO look at that; PIMCO just this summer released a forecast that annual returns will be in the area of 4.2% over the next five years, and a dismal 1.5% over the next 10 years.
As we mentioned before, we’re riding a 5-year rise in the markets…which means we may face a possible correction that will hurt investors:
What happens when you buy at the peak? Let’s look at history. What would you have earned if you bought stocks at the peak of the tech bubble in 2000 and just held them until today?
- 10.5% total return over 13 years
- 0.81% per year—before fees and taxes
What can investors do?
If you’re looking for income, there are a few areas I am recommending to my clients:
- Carefully selected high yield bonds
- There are mutual funds where you can buy $1 worth of tax-free muni bonds for 0.85 cents.
- Carefully selected dividend stocks in US
- Consider selling covered calls for a more reliable income stream.
- Global bonds
--Jerry Wade, CFP®, CFS
Chief Investment Officer, Wade Financial Group
UPDATE: Jerry was interviewed on this subject on WCCO radio, on Tuesday, October 8. Listen to the full audio of the interview.