I’ve probably mentioned this article a long time ago, and I decided now was a good time as any to revisit it: “The Single Greatest Predictor of Future Stock Market Returns” written in 2013.
I think the indicator is the percentage of all US assets that are invested in equities. That ratio can be pushed upwards in the current scenario if everyone bids up the price of equities finding nowhere else to get a good return. The author then shows that the higher this ratio, the lower the future return. It is a nice straight line with an R^2 of 0.913.
The ratio is calculated here and is 0.476 which is the highest since before 1950 with the exception of the bubble of 1998-2000 where it peaked at 0.518 before popping and retreating to 0.358 four years later. At the low of the 2007-2008 recession it bottomed out at 0.267
The author doesn’t provide the exact formula but gives a graph from which it could be estimated here:
If we go over to 0.476 and go up to the line, the formula tells us to expect a 1% return for the next decade. And quite a lot of the dots are within 2-3 percentage points of the line. My ambitious retirement plan assumes a 5% return on investments so perhaps I won’t be retiring quite as soon as I’d hoped…
I don’t know how the pics will turn out I’ll try putting them on a separate post.