As reported by Brett Arends, here:
Smithers found that over the past century the Shiller PE had an R-squared to subsequent returns of 0.52, the “Pseudo-Indicator” one of 0.61, and the q an astounding 0.79.
So if the past is any guide, if you want to get a good estimate of the future returns from today’s stock market you should completely ignore the low yields on cash, certificates of deposit, or bonds. You should pay more attention to the Shiller PE, and you should pay the most attention to the Tobin’s q.
And what do these tell you? “As at the 31st December, 2013,” says Smithers, the “q indicated that U.S. non-financial equities were overvalued by 73% and CAPE indicated an overvaluation of 76% for equities, including financials.”
