Unfortunately, the Eaton Vance study fails the sniff test in a number of important ways. First, while 10-year returns have been very poor, the current 10-year period began with market valuations over 4 standard deviations from long-term averages (See chart 1.) Current valuations, with a Shiller PE of 20.6, place stocks within the top quartile of valuations going back to 1870, despite stocks' poor performance over the past decade.
In fact, an optimized regression of forward 10-year returns against prevailing Shiller PE provides for a mean expected real return to stocks over the following 10 years of 4.6%, versus a long-term average real-total return of 6.6% (see chart 2.)
Source: Butler|Philbrick & Associates
Source: Butler|Philbrick & Associates
Further, a simple regression of 10-year returns to 10-year forward returns demonstrates conclusively that the relationship is statistically weak. In fact, the R-square of the regression yields an explanatory factor of just 10%. In other words, prior 10-year returns explain just 10% of future 10-year returns (See chart 3.).
Source: Shiller (2010), Butler|Philbrick & Associates
What we do know is that long-term returns can be quite volatile indeed. The following charts show rolling 10, 20 and 30 year real returns to the S&P since 1870.
Source: Shiller (2010), Butler|Philbrick & Associates (2010)
Source: Shiller (2010), Butler|Philbrick & Associates (2010)
Source: Shiller (2010), Butler|Philbrick & Associates (2010)
Source: Shiller (2010), Butler|Philbrick & Associates
What we do know is that long-term returns can be quite volatile indeed. The following charts show rolling 10, 20 and 30 year real returns to the S&P since 1870.
Source: Shiller (2010), Butler|Philbrick & Associates (2010)
Source: Shiller (2010), Butler|Philbrick & Associates (2010)
Source: Shiller (2010), Butler|Philbrick & Associates (2010)