Robert Shiller and John Campbell initially published on P/E Ratio predicting later real returns in this 1988 paper. In 1996 Shiller followed up the research with this easily digestible paper on the topic. In summary he found that the random walk theory does not look right and that current valuations have a strong predictive ability for future long term returns. Over the short term noise prevents prediction, whereas over the long term, ten years, current valuation levels are predictive of future returns.

As I have said before the voting machine should be used for the short term, the weighing machine for the long term.

There remains way to much focus on calling a bottom and looking for signs of a market bottom based on historical analysis. While it is important to be versed in the market’s history and use that knowledge as a rough guideline, my focus is on the here and now.

Following on from yesterday’s How Low Can We Go, I thought it would be good to look at the S&P earnings data. The S&P data shows TTM reported earnings have been falling for a year after peaking in Q2 2007 at $84.95. Earnings are down 29% to $60.39 as of Q1 2008. As if that is not bad enough, estimates for Q2 08 predict earnings hitting a low of $51.68 before improving slightly in Q3 and improving thereafter.
A rosier view is gained by concentrating on the quarterly earnings rather than …

How low can we go? Dow 8000? S&P 500 in the 900s? Or are we already close to the bottom? It’s time for a historical refresher. The S&P500 closed last week at 1,099.23, the Dow at 10,325.38. It has been a very bad year thus far as this poster on TMF points out. Since 1926 this is currently the fifth worst calendar year for the S&P and the fourth worst rolling decade.