I downloaded the Wilshire 5000 index data from FRED, the CAPE data and the Season-adjusted CPI data and made two linear regressions: Cape VS next 10yrs nominal return & Cape VS next 10yrs real return. Why is it that I get a r-squared of .80 with nominal return, but a .50 with real return?
My guess is that the CAPE ratio is a good long-term performance predictor, but it cannot predict inflation so that's why it's less accurate when we compare it to real return.
So if I want to estimate the LT US stock market return, should I use the nominal return regression or the real return regression?
Submitted June 17, 2018 at 10:29AM by etienner https://ift.tt/2Mx7KqI
