Kay Conheady has posted a super article for the Advisor Perspectives site. It is titled Does the Trend Matter?
Kay was kind enough to include my name in a list of the people who have done the most to promote the Valuation-Informed Indexing concept. She wrote: “I am fascinated by the growing body of research that revolves around the P/E10 ratio (and its siblings, the P/E5, P/E15 and so on), also known as the cyclically adjusted or normalized P/E ratio. In the past 5 years there have been numerous articles published at Advisor Perspectives as well as independently and in professional journals by numerous researchers: Robert Shiller, Doug Short, Wade Pfau, Michael Kitces, John Hussman, Crestmont Research, Jim Otar, the team of Mike Philbrick and Adam Butler, Rob Bennett and others.” It brought a nice measure of cheer to my Tuesday afternoon to read those words.
Juicy Excerpt: The average annualized 10 year future return during P/E10 ratio downtrends is less than 1%! Downtrends would seem to pose substantial challenges even for long term investors. And, while average returns vary quite a bit between the trends (Figure 2), standard deviation doesn’t which leads to quite divergent Sharpe Ratios (Figure 3)! It seems fair to say that 3, 5 and 10 year risk adjusted future returns tend to be quite a bit higher (as do absolute returns) during uptrends versus down trends!