New GMO Forecasts: Equity Investors Are Screwed

The methodologies underlying most market forecasts do not have much predictive value, and as a result, the predictions are no better than the standard market odds (and in many cases worse).  What are these odds?  To pick one example, the odds that the S&P 500 will go up over any given year are about 2-in-3.

One firm that produces forecasts using a thoughtful, defensible methodology is Boston's GMO.  The firm makes no claim that it can predict performance over short and intermediate-term timeframes (Chairman Jeremy Grantham's recent foray into "Presidential Cycle" forecasts produced a few bad calls, so he has since returned to his valuation-based knitting).  Instead, it estimates the likely performance of a half-dozen major assets over a seven-year period. 

GMO's forecasts are based on a "cyclically adjusted P/E."  Unlike most P/E analyses, the cyclically adjusted P/E takes into account the business cycle, "normalizing" today's record-high profit margins under the theory that they will eventually regress to the mean.  (If they don't, Grantham is fond of saying, capitalism is broken.)  Work by Andrew Smithers of London-based Smithers & Co. has shown that such "cyclically-adjusted" analyses have predictive value, while those that look at a single year's earnings in isolation don't.  The one caveat (there's always one) is that this valuation metholody depends on mean-reversion.  On the rare occasion when things are, in fact, "different this time," it doesn't work.

In any case, GMO recently published its asset-class forecasts based on prices at the end of January.  For those who like their bad news delivered graphically, GMO's own publication is vivid.  For those who prefer text, here's a snapshot:

Real Seven-Year Asset Class Return Forecasts (Expected annual return over 7 years. Source: GMO)

U.S. Equities (Large cap):  -1.7%

U.S. Equities (Small cap):    -2.6%

Int'l Equities (Large cap):     -0.3%

Int'l Equities (Small cap):     -2.3%

Emerging Equities:              +1.6%  (Hallelujah)

U.S. Treasury Bonds:            +2.0%

The bottom line?  Unless you can limit your equity exposure to "high-quality" stocks, GMO expects you'll lose ground to bonds.

Comments

[Buy Viagra]

Hello
Nice information about New GMO Forecasts: Equity Investors Are Screwed . I've just known about it from this site..Thanks for sharing this article. I appreciate it.