Subject: Re: OT: S&P versus T-Bills?
Based on monthly data, starting the beginning of 1950, the rolling 5 year average SP500 (GTR1 ^S5T) return is 1.77. The median is 1.74. The range is 0.67 to 3.58.
When CAPE exceeds the 97th percentile, the 5 year average return is 1.32 and median is 1.10. The range is 0.833 to 2.93...

Though I don't doubt any of these figures, they're really not needed.

Think of the S&P 500 as one company. It's revenues and earnings are a bit irregular over the business cycle, but they track GDP extremely closely over longer periods of time, and unlike a "normal" company we know that will continue. It won't, and can't, grow at a rate higher than average, but neither will it go bust. There is a modest dividend coupon.

Rather obviously, this steady earner is a better deal when it's cheap (say, 5.6% earnings yield) than when it's expensive (say, 2.8% earnings yield)*. The result is pretty obvious, and it doesn't really matter whether you value based on earnings, dividends, sales, or book value: when you pay twice times as much for something, you get only half as much value in return for your invested dollar. You'll have half the total value at the end, even if you hold for a thousand years. Some metrics might make this obvious conclusion a little bit clearer than others, but if you find a metric telling you something other than the obvious, it's just a mismeasurement. e.g., you're looking at some short intervals that it simply got more expensive for a while.

But the truth is far simpler. If you buy a slow grower at a high price (and hold for longer than a market rally), you will not get a high return. You know in advance what you're going to get, so buy it only when that seems like a decent return on your money. If you're already aware that the forwards returns from here will necessarily be low because of the high current price relative to known future value, and you don't mind a low rate of return, go for it.

Jim


* FWIW, those figures are roughly the 10th and 90th percentile smoothed S&P 500 earnings yields since 1995