With the stock market traded at all time highs, Shiller P/E now suggests that the market will return 1.5% a year over the next decade, including dividends. If we remove the 2% a year contribution from dividends, the return will be negative. This means that S&P 500 index itself will be lower 10 years from now than it is today.
Another lost decade?
This conclusion is similar to what we get from the ratio of total market cap over GDP, which is suggesting a 2.1% a year (including dividends) market return over the next decade.
The ratio of total market over GDP is now 113%, which is about where the market peaked at in Oct. 2007, right before the beginning of the market crash. The Shiller P/E actually provides a more optimistic picture. Currently it is lower than it was in Oct. 2007 by about 10%. This is caused by the higher profit margin over the last five years than the previous 5 years.
We have no way of knowing where the market will go over short term, or even long term, for that matter. Any bearish predictions of market in the last 5 years have been proven wrong. But we do observe that our list of Ben Graham Net-Net is drying up for the US market. In contrast to the US market, plenty can still be found in Asia.
Steven Romick, manager of FPA Crescent Fund, weathered the 2008 market crisis better than most of other investors, is having difficulties finding things to buy. He wrote in his latest shareholder letter: “We have found ourselves with little alternative but to make some sales… We'd like nothing more than to shift to a higher gear and increase our exposure, but given the lack of securities offering a genuine margin of safety, we're content to stay out of the fast lane for now.”
In a recent interview on CNBC, Warren Buffett said that stocks are fair valued to him, and he couldn’t find much to buy.
The last time when Warren Buffett said he couldn’t find things to buy was 2005. Stock market continued to roar up for another two years. In any cases, not a lot of bargains can be found. If you are searching for companies that will outperform the market average in a fully valued market, take a look at GuruFocus Buffett-Munger screener.
Sector Shiller P/E shows that energy sector is relatively cheap. It has a Shiller P/E of 15.4, compared with the general market Shiller P/E of 24.5. If you want to look into the energy sector, follow the All-In-One Screener link.
What will you do in this market? Sell some stocks and get prepared for the future opportunities, like Steven Romick, or "We all know this will end badly. But let's us make some money first," like Jim Cramer.