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Cliff Asness has seriously bad news for investors

Clifford Asness, president and managing principal of AQR Capital Management LLC.
Jonathan Fickies | Bloomberg | Getty Images
Clifford Asness, president and managing principal of AQR Capital Management LLC.

Investors don't have a lot to look forward to in the years ahead if Cliff Asness is correct.

The head of AQR Capital said Tuesday that looking at basic market valuations shows that stocks are expensive.

Compounding the issue is that an analysis of bonds indicates they, too, are not cheap, particularly if inflation picks up and interest rates rise.

"They're not usually expensive at the same time like they are now," Asness, whose firm manages more than $136 billion for clients, said at the Bloomberg Markets Most Influential Summit. "This could mean revert, meaning we could have (prices) fall and restore good returns going forward, or we could stagnate for a long term."

Asness based his assumptions using the Shiller Cyclically Adjusted Price to Earnings ratio, currently at 25.18, which is well above its typical long-term average of 16.63. Flipping the ratio around tells Asness that longer-term annualized stock returns are likely to be closer to 4 percent, compared to the average inflation-adjusted return of 7 percent for the S&P 500, with the typical stock-to-bonds portfolio delivering returns closer to 3 percent.

He said "facing up" to returns that will be less than the historical norm is the "single largest factor out there we have to deal with."

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The only saving grace, he said, would be a change in valuation or profit growth, the latter which he called "the most pleasant way."

"The only way (bonds) do better is if we get serious deflation," Asness said. "If we get a 10-year period of substantially better earnings growth, it solves a lot of problems."