Valuation Levels – The Long and Short of It

I came across a well written piece on valuation (found here) referencing Shiller P/E  (price to earnings ratio).  I usually keep an eye on Shiller P/E as it appears to give a good perspective on the type of future returns going forward for equities.  As the chart below shows long lasting bull markets tend to happen when Shiller P/E is at lower multiples:

As of now Shiller P/E is around 24.  So based on this metric does that mean stocks will inevitably disappoint?  Of course not; however, as the article indicates the probability of having stellar returns over the next 10 years isn’t high.  In fact, the average annual real returns (after inflation) for the subsequent 10 years is -2.6%.  Thus, it would appear stocks aren’t priced well for fantastic returns over the next 10 years.  I would like to add a few caveats though:

• Different subset equity asset classes may be priced differently.  GMO research in the article suggests Large Caps are priced better than Small Caps. 
• In the short-term, Shiller P/E does a poor job of forecasting.  
• Per Sitka Pacific Capital, LLC research  when the Shiller P/E starts the year above 21  the returns ranged from -30% to +33% in the current year.