PT - JOURNAL ARTICLE AU - Joseph Davis AU - Roger Aliaga-Díaz AU - Harshdeep Ahluwalia AU - Ravi Tolani TI - Practical Applications of Improving U.S. Stock Return Forecasts: <em>A “Fair-Value” CAPE Approach</em> AID - 10.3905/pa.6.1.275 DP - 2018 Jul 31 TA - Practical Applications PG - 1--6 VI - 6 IP - 1 4099 - https://pm-research.com/content/6/1/1.9.short 4100 - https://pm-research.com/content/6/1/1.9.full AB - In Improving U.S. Stock Return Forecasts: A “Fair-Value” CAPE Approach, published in the Winter 2018 issue of The Journal of Portfolio Management, authors Joseph Davis, Roger Aliaga-Díaz, Harshdeep Ahluwalia (all with the Vanguard Group), and Ravi Tolani (of Duke University) introduce a new method of forecasting equity returns in real time (not in sample) using the cyclically adjusted price-to-earnings(CAPE) ratio. They call the result a “fair-value CAPE model” to distinguish it from traditional approaches that use CAPE ratios to forecast future equity returns.The authors demonstrate that their fair-value CAPE provides a better tool for forecasting of future stock returns in real time than the original CAPE and its subsequent variants. The new twist in the fair-value CAPE model is the use of bond yields, inflation, and volatility in calculating the ratio. The authors forecast (as of July 2017) that the return on U.S. stocks over a 10-year period would be 4.9%, which is lower than the long-term historical average.TOPIC: Performance measurement