1 Forecast returns are constructed assuming a 60% equity, 40% fixed income portfolio in which the returns of each component are based on the outputs of a linear regression of the realized 5-year forward S&P 500 returns relative to the initial 1-year forward price to earnings ratio from 1990-2016 for equities, and a similar regression of the realized 5-year forward returns of the Bloomberg Barclay’s US Aggregate Bond Index against the initial interest rate on the U.S. 10-year Treasury from 1976-2016 for fixed income. These time frames were chosen based on the availability of forward S&P earnings estimates (initially becoming available in 1990), the available history of the Bloomberg Barclay’s US Aggregate Bond Index, and the availability of – year realized returns. Recent period in which forecasts returns fall below zero are driven by negative expected returns within the equity component in the 60/40 portfolio, as the regression model assumes negative 5-year annualized returns in equities following periods where starting P/E multiples exceed 23.2x.
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