Category Archives: Stock markets

Best in test: And the best stock return predictor is…….. end-of-the-year consumption growth

A new paper thoroughly examines the empirical performance of leading stock-return predictors. Most predictive variables perform poorly. One variable stands out as a consistent predictor, though: End-of-the-year consumption growth, a variable Stig V. Møller and I introduced in 2015. It feels a little like winning the “world cup in return prediction”.

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Frothy stock and housing markets: How worried should we be?

Historically, either stock markets or real estate markets have been frothy during periods of market exuberance. Today, according to usual metrics, both stock markets and real estate markets trade at historically elevated levels. I admit I am getting nervous. True, there are comforting factors. Most importantly, credit growth is low. Second, it is always difficult to predict when markets turn sour. I discuss arguments for and against looming real estate and stock market turbulence. I conclude that monetary policy fuels bubble-like behavior in asset prices, and that Quantitative Easing (QE) should stop. But what will happen then?

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Summer reading: Probabilities of tail-events

What is the likelihood that we will see high inflation? What is the likelihood that we will see deflation? What is the likelihood that the stock market will crash? And what is the likelihood that it will continue rising? How likely is it that real estate prices will fall, and how likely is it that they will rise? And what about the exchange rate? Find the answers to these questions in this summer story.

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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.

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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.

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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.

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2020

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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VV or W: When did (or does) this recession end?

This corona recession started in February 2020. Officially, it is still ongoing. But, perhaps, it has in fact already ended. This might seem confusing but it helps explaining the performance of financial markets during this “recession”.

In my soon-to-be-released book From Main Street to Wall Street (link and link), I – among many other things – carefully examine the historical relation between the business cycle and financial markets. I verify that stock markets typically perform considerably better during expansions than recessions. In the book, I examine and explain why this is so. I also explain that this is not a bulletproof finding. It is not always so. Sometimes stock markets do fine during recessions. Is this recession one of them?

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