Feb

9

Accuracy and precision are conflicting traits in any forecast. Most market forecasters are completely inaccurate, is it because they are trying to be too precise? After all, what kind of forecaster would get paid if he didn't at least try to nail down next year's market return within 5%?

Perhaps more value can be added by drastically reducing the attempted precision, and so I offer the following:

The market gives 10% per year to those who are willing to freely accept it. This 10% includes big drawdowns such as 2000-2002, and fall 1987.

Therefore, if one could target precision of simply "is there a high chance of a 30% drop in the market", one could add a worthwhile amount of return to the 10% offered by the market.

The P/E ratio is probably the ratio that is most commonly used in inaccurate forecasts, but I give you the following:

I don't know which direction the market is going to go, and I don't know what will happen to corporate earnings.

I do know the following per the graph: Despite the strong bull market since 2003, the PE ratio is exactly where it was at the start of the late 1990's bull market. Combine that with the fact that the Earnings yield on the SPX - the 10 year yield is positive (and it was negative in 2000 and late 1987), we can perhaps safely assume that a negative 30% year is not in the cards, and therefore the expected return on the stock market this year is greater than 10%.


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