Tuesday, November 18, 2008

Expected Return

This picture, courtesy of Johns Hopkins econ prof Chris Carroll, shows the correlation of the stock market's price-earnings ratio (where earnings are a 10-year average) and the subsequent real return on equities. The point labelled 1996 is the era dubbed "irrational exuberance."

The bottom line: Right now, the expected inflation-adjusted return is about 6 percent.