What can I expect

We calculate the P/E ratio on stocks using Robert Shiller's method: Take the last 10 years of reported earnings on the S&P500; adjust for inflation; average those numbers. That produces a quite reliable figure for future earnings expectations -- the peaks and valleys of the business cycle (and accounting manipulation) get smoothed out and we have a sensible picture of the capability of this group of 500 companies to make money.

The "Shiller P/E" closed at 12.3 today. So, I ask a simple question:

In past eras, what have stock returns looked like in the five years following a P/E like this? In other words, if I bought stocks when the Shiller P/E dropped under, say 13, how did I do over the next five years?

Answer below.

The image is a little fuzzy (click on it for a clear enlargement), but that "Worst 20%" bar says 4.7% per year; the "Best 20%" bar says 20.1% per year. How many periods only returned 1% or less? Four out of 417.

Our message: This is not the time to panic or bail out.