The market today looks a lot like it did in the late nineties. What does that mean for stock investors?

“History doesn’t repeat itself, but it often rhymes.”

--Mark Twain (allegedly)

There’s plenty of concern about the level of the current domestic stock market, as well as about the returns that could be available by investing any new money today. The market, after all, is not only at an all-time high but is also trading at above long-term historical average market multiples, and is doing so at a time of significant political discord. It’s been reported many times that the market doesn’t “like” uncertainty. Given the levels of uncertainty surrounding any number of issues being debated in the federal government, it seems as if stock prices should not be going higher, as they generally have over the past seven months since the presidential election.

I’ve seen the bearish — sometimes extremely bearish — case for future market returns intelligently made and defended with supporting arguments, with reference to long-term historical price-to-earnings ratios, Shiller CAPE, and current experienced and expected earnings growth rates. But for a little perspective on where we are right now, let’s do a quick little compare and contrast to where we were exactly 20 years ago.

In June 1997, the stock market was also at an all-time high, after having set numerous other all-time highs throughout the year. At the same time, President Clinton was under the investigation of a special prosecutor, though this was far from a new development. The investigation was going into its fourth year — and keep that in mind as we watch the current happenings in Washington. In 1997, market multiples were significantly above where they had been only a year or two before, and well above what their averages had been for most of recorded equity history.

Here are the relevant price-to-earnings ratios for the market, measuring June 30, 1997, against June 12, 2017, the day I’m writing this letter.


Operating P/E (Trailing 12 Months)

GAAP Reported P/E (Trailing 12 Months)

Shiller P/E




31.25 (on 7/1/1997)





*P/E = price-to-earnings ratio

Along these general metrics, the market was more or less exactly as expensive, or cheap, 20 years ago as it is today.

Over the next 20 years, through the bursting of the internet bubble, a couple of recessions (including one very big one starting in 2008), the 9/11 attacks, the impeachment of a president in 1998, more than one contentious election (one of which necessitated Supreme Court involvement), the bursting of the housing-market bubble, and hundreds of other good and bad developments, the market returned almost exactly 7% per year, or, after deducting for inflation, 5% per year.

The math behind how those returns came about is rather simple.

  • Total returns = 7.1%
  • Inflation = 2.2%
  • Dividends = 2.1%
  • Earnings-per-share growth = 5%
  • Real S&P 500 returns (subtracting inflation) = 5%

It’s a simple fact of math that if valuation multiples are the same at the beginning and end of a measurement period, returns will equal earnings growth plus dividends paid. And that’s what has occurred over the past 20 years. It didn’t have to happen that way, and it’s highly rare that it will, but when it does, it makes the math simple. Do not expect P/E ratios to be exactly the same in 20 years as they are today.

But simplicity isn’t the same as predictability. Even though a 20-year period is enough to provide some counterarguments to those who argue for the inevitable mean reversion of multiples to pre-1990s levels, it’s just one 20-year period. Some 20-year periods will show market returns well above 10%, and a very few will show nearly flat returns when adjusted for inflation.

There are some important differences, of course. Real gross domestic product** in 1997 was growing at a better than 4% annual clip and continued to do that through 1999. And there wasn’t anything unusual about that level of economic growth. Earnings today are perhaps elevated by above-average profit margins for corporations — but on the other hand, those profit margins have been relatively stable over the past six years and weren’t any higher in 2016 than they were in 2006. The emergence of higher-margin technology companies constituting an increasingly larger part of the equity market while low-margin manufacturing companies become less relevant may mean that higher margins are a permanent part of the investor experience. Maybe.

And historically low interest rates, which basic economic theory would tell you help lead to higher market multiples — they don’t have to last forever, though they’ve been around for going on a decade now, and long-term rates are still priced very low by the market.  

At this moment, history is rhyming with mid-1997 in some ways (P/E ratio, political strife), and not in others (growth in the economy, division of profits between shareholders and workers, interest rates). So what are the real return expectations for investors? That’s a realm of unending debate, but one individual, Jeremy Siegel, has a longer track record of measuring the market’s returns and using past as prologue than most do.

In January 1994, Siegel’s book Stocks for the Long Run was published. In it, he noted that the long-run returns of the market averaged around 6.5% per annum over most very long time frames. However, given elevated stock prices in relation to earnings in November 2001, he predicted, “An analysis of the historical relationships among stock returns, P/Es, earnings growth, and dividend yields and an awareness of the biases justify a future P/E of 20 to 25, an economic growth rate of 3 percent, expected real returns for equities of 4.5-5.5 percent, and an equity risk premium of 2 percent.”

From November 2001 through May 2017, returns equaled 4.8% annually, so it looks as if Siegel got the bottom line just right. The P/E multiple as well is right where Siegel proposed it should be found, in the middle of the 20-to-25 range.

At the most recent annual meeting of the CFA Institute, Siegel maintained an outlook of 5% real returns for stocks, so not much has changed from his perspective. While it may look to many as if today’s market is priced excessively high, the past two decades give somewhat of a road map for how 5% annual real returns are achievable: Just begin and end with the same multiple as today, continue growing earnings per share 5% a year, and keep inflation at 2% and dividend yield at 2%.

Each one of those things is possible, but adding it all up to 5% real future returns falls on the optimistic side of the expectations spectrum, given in particular the slowing growth rate in the economy and the direction that interest rates are (slowly) going. A slower-growing economy weighs on the earnings growth rate, and any increase in interest rates will weigh on the multiple one can expect, though remember that interest rates were much higher 20 years ago than they are today and the valuation multiple differs only if you squint really hard as you look at it.

Still, Siegel’s got a pretty good track record on these long-term predictions, and his optimism is worth remembering as you consider other more dire predictions about future returns. History, though it won’t repeat, could rhyme more than the bears expect. 

**Gross domestic product is defined as the total value of goods produced and services provided in a country during one year.

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