The latest was published on April 30, 2020.
That means large U.S caps should return a real negative 3.6% per year over the next seven years with 2.2% US annual inflation. Or around negative 1.4% per year once inflation is taking into account, while emerging stocks should return 3.5% per year plus inflation (no assumption for non-US asset classes).
So how well does not indicator actually work? It's clear it's not an exact timing tool, as it will likely be incorrect during a bull market, and become right once a bear market occurs. But let's check about past 7-year forecasts, namely:
GMO 7-year forecast Q1 2011 with a -2.8% annual return forecast for small U.S caps.
GMO 7-Year Asset Class Forecasts - October 2012 with a -0.3% annual return forecast for large U.S. caps.
I'm not sure which indices GMO is using exactly, but I'll go with the S&P SmallCap 600 Index (S&P 600) and Dow Jones Industrial Average (DJI) respectively.
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| Source: Investing.com |
The S&P 600 was at 457.95 points on April 1, 2011. With a -2.8% real annual return, plus 2.2% inflation, the S&P 600 should have been at 439 points on April 1, 2018 with a return to the mean. But the actual level of the S&P 600 was about 947 points.It still did not happen two years later, but maybe latter the year, or next, as the US market is very much overvalued.
Let's switch to the Dow Jones now for October 1, 2012 and October 1, 2019.
The Dow Jones was at 13,096 points on the October 1, 2012. A -0.3% real annual return with 2.2% inflation would mean the index should have been at
14,960 points on October 1, 2019 assuming a return to the mean. Actual Dow Jones level on October 1, 2019: 25,605 points. It did not work too well either for large caps, but I believe that's yet another indicator that US stocks are vastly overvalued. How long the craziness will last is for anyone to guess.
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