Probable Outcomes: Secular Stock Market Insights by Ed Easterling is a follow-on to his excellent book Unexpected Returns: Understanding Secular Stock Market Cycles.
The book begins by reviewing and elaborating on how to understand and identify what drives secular stock market cycles. Students of secular market cycles or those who follow Easterling’s work will recognize the key theme of these chapters: those who invest hoping to achieve the long-term “average” returns for the stock market will feel lucky (or smart) during secular bull markets that typically produce mid-teens average annual returns and frustrated (or give up trying) during secular bear markets that typically produce zero or negative real returns.
In the first few sections, the author reviews the characteristics of these secular markets, describing what economic conditions drive changes in P/E multiples and thus eventual returns to the stock market over time. A discussion about various states of potential economic growth and inflation could have been improved with a more global perspective on what will drive future changes to the U.S. economy. Easterling spends considerable time discussing the difference between the widely used Cyclically Adjusted P/E produced and popularized by Robert Shiller (www.irrationalexuberance.com) and his own version which aims to improve on the widely used (but often ignored) measure. While some market geeks will appreciate this debate and find Easterling’s measure more compelling (as I did), the nuance is probably lost on most readers and may be distracting. The middle chapters of Probable Outcomes also includes a few timely gems like a discussion of divergences of current Earnings from normalized trend and evaluating stocks using the concept of Present Value that will give both novice and seasoned investors something to chew on.
The real meat of the book comes in Sections four and five where the author leads a discussion on assessing the current valuation of the market, likely economic trends, and the implications for future returns. While the book was published using year end 2009 data, the conclusions remain suitable and poignant while all of the charts are updated on the author’s website, www.crestmontresearch.com. The author addresses each of the major investor groups from early accumulators to retirees to pension plan sponsors and describes the key issues each group should be aware of when attempting to navigate a secular bear market. Whether you belong to one of these groups, or make a living advising them, Easterling gives you the information you need to act and the inspiration to do so.
Easterling does an excellent job of presenting the likely challenges investors will face over the next decade, the prospect for low or even negative annual returns, and why a low-volatility, absolute return approach will help us navigate the markets. Probable Outcomes is a book that belongs on any serious investor’s book shelf and should be referenced frequently.
Book Source: I received a copy of Probable Outcomes because I asked for it. The review was done of my own volition.