Category Archives: Stock markets

Yield, growth, and valuation

Yield, growth, and valuation drive stock returns. Historically, in long-run US data, yield has been most important. This is no longer the case. Since the financial crisis, and in particular during the past couple of years, increasing valuations have been the main drivers of stock returns. Unless there are permanent bubbles in the stock market, valuations cannot continue to increase indefinitely but will eventually revert. Recent stock-market turmoil makes sense in this light.

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Three unusually good years in markets. Why and will it continue?

A few months ago, I argued that there is a real risk stock markets will suffer when central banks tighten monetary policy in response to high rates of inflation (link). This is what we are witnessing now. Stock markets have struggled since the turn of the year in response to monetary policy take-offs and rising rates. To understand why this is happening and where we come from, this blog analyses the performance of the stock market during the past couple of years. Stock returns have been unusually high, given subdued economic growth. How can we comprehend this apparent contradiction and what does it imply for the future?

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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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