Taking a more positive view than many on Wall Street, Vanguard Group CIO Gregory Davis said in a recent interview that the U.S. will see only a mild recession over the next 24 months. The interview is cited in an article in Chief Investment Officer magazine.
According to Robert Shiller’s popular CAPE model, “the S&P 500 has averaged 17 times the average annual inflation-adjusted earnings over any trailing 10-year period,” the article details. However, since the turn of the 21st century, CAPEs have averaged higher, at 26 times. Looking at 22 instances of success in buying the halfway point, 20 of them happened when the buying occurred at CAPEs of 20 or below. Meanwhile, when the CAPE was above 20, there were two successes(2004 and 2020), one failure (1930), and one likely failure (this year).
It’s alarming to realize that when the similar scenario happened in 1930, what followed was the worst economic depression in history and World War II; it was 16 years before the CAPE came down to 11 and the markets began to prosper again. While Brown is not predicting so dire a situation as that, he writes that the downturn earlier this year “was not enough to clear out economic deadwood and deflate bubbles” and that we may still be in for some painful days to come.