Overlaid on the rolling return profile is the Schiller PE multiple, which not surprisingly has a high correlation to market peaks and troughs. After 10 years of near 15% average growth in US equity markets, both rolling returns and valuation multiples are currently close to touching their historic peaks. These metrics are entirely consistent with an environment of high corporate profits, low interest rates and a favourable taxation regime.

However as the chart also highlights, the growth pendulum historically reverts, suggesting future sharemarket gains are likely to be far more challenging than what we have come to experience as ‘normal’ the past ten years. This outlook is entirely consistent with the views outlined in our October monthly report.

Of note, markets don’t need to actually fall for the slope of the ten year growth line to turn negative. A trending sideways market would also have the effect of reducing growth and valuation multiples. While there are plenty of reasons why markets may fall, a lower return environment may simply be the least painful path for these multiples to normalise.

Given the predominantly systematic nature of our investment process we never try to predict precisely when these return profiles will roll over. Market timing calls are notoriously difficult to get right, we would argue near impossible. We do however have a great deal of confidence in one of our core beliefs – that income has the capacity to smooth returns and by doing so reduces the significance of market timing. Through generating most of our returns via income, our funds are less reliant on the movements in capital to deliver on our objectives.

We believe this approach will be rewarded should the historical rhythm return in coming years.