From Main St. to Wall St.: Expected returns

In this final post dealing with my book From Main Street to Wall Street, I describe how one can use insights gained from its initial parts to make predictions about the future. Along the way, I discuss how likely it is that we are heading for a recession (the likelihood is low) and why we should expect low returns going forward. I also give you my best guess of the expected real return from US stocks. This is low, too.

Knowledge about the theory of and historical relation between economic activity and financial returns is useful when dealing with the outlook for financial markets. This is how I have structured my book. I first describe the long-run historical relation between economic growth and returns, then the business-cycle relation, and finally how we can use these when making predictions about future returns. I have described the business-cycle and the long-run relations in previous posts (link and link). This post deals with expected returns.

Let me start with a cautioning remark: It is easy to misunderstand what we mean by “expected returns” or “forecasting returns”.

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From Main St. to Wall St.: The business cycle

What is the relation between economic activity and the stock market over the business cycle? This blog post presents some of the conclusions from my book From Main Street to Wall Street. One conclusion is that the business cycle has a strong impact on the stock market, another that post-1945 business-cycle dynamics are very different from pre-1945 business-cycle dynamics.

In this third part of my small four-part series of blog posts presenting glimpses of my book From Main Street to Wall Street, I turn to its examination of the relation between the stock market and the economy over the business cycle. It follows my first post (link), where I explained why I wrote the book, and the second (link), where I presented some of the book’s conclusions with respect to the long-run relation between the stock market and the economy.

The business cycle

In this part of the book, I explain what the business cycle is, what characterizes it, what causes business-cycle fluctuations in economic activity, and economic theories that explain business cycles.

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Expected returns, spring 2021 forecasts

Today, May 4, 2021, the Council for Return Expectations publishes its updated forecasts. We still expect very low – negative – returns on safe assets, though not as negative as we expected six months ago. We also expect marginally lower returns on risky assets. Compared to six months ago, we thus expect a lower equity risk premium.

I chair the Council for Return Expectations (link). Danish banks and pension companies use our forecasts when they project how their customers’ savings will develop. In this blog post from July last year (link), I describe the history of the council, who we are, why we publish expected returns, what they are used for, and so on.

Twice a year, we update our expectations. Today, we publish our latest forecasts.

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From Main St. to Wall St.: The long run

What is the long-run relation between economic activity and the stock market? From Main Street to Wall Street analyzes, inter alia, this question. Here, I present some of the conclusions.

As mentioned in my previous post (link), From Main Street to Wall Street describes how economic activity influences financial markets, in particular stock markets. It distinguishes between the long-run and the shorter-run relation. The “long run” refers to decades, even centuries. The short run refers to months, potentially a few years.

This post presents some of the book’s conclusions with respect to the historical long-run relation between the economy and the stock market. This is both an intriguing and fascinating topic, and the conclusions are not always as one would have guessed a priori.

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From Main Street to Wall Street

My book – From Main Street to Wall Street (link) – has been published. This blog post explains why I wrote the book and its contents. The next three posts (that will be sent out in due course) will present some of the analyses and conclusions from the book.


Let me start in 2008. The financial crisis was at its worst.

I was a young professor of finance. I studied financial crises (my Ph.D. is on currency crises) and the relation between the macroeconomy and expected stock returns.

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Yields and inflation expectations

During the last couple of weeks, yields have been rising and stock markets falling. Standard market turbulence is not interesting for this blog – stocks go up and down, most of the time up, and yields fluctuate – but intriguing (and expected) patterns characterize recent events.

Everybody seems to agree what is going on markets these weeks: Vaccines are successful and being rolled out, so economies will open up soon, and Biden will get his stimulus package to the tune of USD1.9tn. These two things (an already strong economy when opening up and on top of that a large stimulus package) will lead to very strong growth during the second half of 2021. Inflation will rise and the Fed will have to tighten monetary policy. The expected rise in inflation and the policy rate leads to increases in yields today. This hurts stocks. These US developments spill over to other countries.

This story largely makes sense. Looking at the data, however, interesting outstanding issues remain.

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The global cost of the crisis

Based on IMF forecasts, I calculate the global cost of the crisis as foregone (because of the pandemic) global economic activity up until 2024. The cost amounts to USD 23,600bn, a quarter of global output in 2019. The cumulative output loss is almost twice as large in developing and emerging economies as in advanced economies, though China is an outlier. The calculation represents a lower bound on the final cost, as economic activity might not recover until 2024. Also, the calculation does not include health-induced costs, the inclusion of which would further increase the cost.

As the final (at least for the time being) part of my analyses of the cost of the crisis (link and link), I present here my calculation of the global cost of the crisis.

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The cost of the second wave

Early December 2020, I presented my calculation of the expected cost of the corona crisis in Denmark, taking into account both economic and health-related costs (link). Since then, the situation has turned to the worse, and the expected cost of the crisis has increased by something like 50%. The calculation here is done for Denmark, but given similar types of waves in the US, the UK, and many other countries in Europa, I would expect similar types of consequences.

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It’s this time of the year. This post recalls events of 2020. It has been such an unusual year, so different from what we expected. Luckily, there seems to be light at the end of the very long and dark tunnel, and – I hope – that 2021 will be considerably more joyful than 2020.

2020 started out so well. The roaring twenties and all that. Wuhan was a city I had not heard of, corona a beer people tell me is best served ice-cold with a slice of lime (I do not drink beer, tough I do enjoy wine), and social distancing words we would only get to know too well. Today, we know that Wuhan is a Chinese city with more than eleven million inhabitants and a marketplace where it presumably all started, corona also means something terrible, and social interaction is an activity we have come to miss so dearly.

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The cost of this crisis

The corona crisis has caused a loss of economic activity. To calculate the total economic cost of this health-induced crisis, we must factor in health-related costs. Based on calculations for the US by Cutler & Summers, this post calculates the economic cost of the crisis in Denmark. Many uncertainties surround such calculations, and I discuss those. It seems a robust conclusion, though, that the cost of the crisis in Denmark will be considerably smaller than the cost of the crisis in the US. The broader implication of this result is that there is considerable variation across countries in the economic cost of the pandemic.

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