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Defying high valuations

Despite their recent sell-off US equities are still close to their most over-valued levels ever – but recent history suggests this might not matter much.

One measure of such over valuation is the deviation of share prices adjusted for inflation from their time trend (both measured in logarithms). I’ve chosen this measure simply because since the index began in 1871 it has done a better job of predicting longer-term returns than either the dividend yield or cyclically-adjusted earnings yield.

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