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Short Summary
Main recommendation: Do not base investment decisions on stock market forecasts or on market timing tools such as the Shiller CAPE or the yield curve; instead, stick to a consistent asset allocation and use long-term expected returns, not historical averages, for financial planning. Ben Felix argues that forecasts are consistently inaccurate and that the best available measures help estimate long-term returns but do not reliably time the market.
Key Points
- Forecasts are unreliable: Larry Swedroe's tally from 2010 through 2018 found only 32% of 69 "sure thing" predictions materialized, and a 2018 study of 6,627 forecasts found 48% were correct.
- The Shiller CAPE (cyclically adjusted price-earnings ratio) can signal lower future returns, but a timing strategy based on it underperformed from 1958 through 2015 because valuations can stay high or low for decades.
- An inverted US yield curve has preceded recessions, but Fama and French found no evidence that yield curve inversions help investors avoid poor stock returns, so switching to Treasury bills after inversions sacrificed the positive equity premium.
- The Shiller CAPE-based implied equity risk premium is the most reliable long-term return predictor the speaker knows of, but it is for financial planning, not market timing.
- Historical returns are a poor planning input: the S&P 500 returned over 11% per year in Canadian dollar terms since 1926, while the current implied expected nominal return for US stocks is about 4.6%.
Details Worth Noting
- Concrete instructions:
- Do not change your investment strategy based on forecasts, recession predictions, or the Shiller CAPE; keep to your asset allocation through time to keep exposure to the equity risk premium.
- For long-term financial planning, estimate expected returns rather than using historical averages: take the earnings yield (1 divided by the Shiller CAPE), then add the expected inflation rate.
- Example from the video: with a US Shiller CAPE of 31.31, 1/31.31 gives an earnings yield of 3.12%; adding expected inflation of 1.37% (the spread between Canadian nominal and real long-term bond yields) gives a nominal expected return of about 4.6%.
- Consider all regions when planning, not just the US: the video cites expected nominal returns of 5.9% for Canadian stocks, 6.4% for international developed stocks, and 8.6% for emerging markets, while noting that shifting between regions based on these figures has not worked consistently.
- When the Shiller P/E was below 9.6, 10-year real forward returns averaged 10.3% annualized (US dollars), with a best-to-worst spread of 12.7 percentage points; above 25.1, they averaged 0.5%, with a spread of 12.4 points.
- The speaker says a recession forecast would not justify changing your investment strategy.
Bottom Line
Forecasts and timing signals are unreliable, so the useful takeaway is to use valuation-based expected returns only to set realistic long-term planning assumptions and to keep a stable allocation.
