Estimating the equity risk premium is the holy grail of investing. That’s because the allocation to the stock market is, for most investors, the primary driver of risk in the portfolio. As a general proposition, one can say that the allocation to equities will (for good or ill) go a long way in determining the portfolio’s return in the long run, and perhaps over the short- and medium-term horizons as well.
No wonder, then, that here’s a lot riding on the outlook for equity returns above and beyond the risk-free rate, which we can define as short-term Treasury bills or, if you prefer, the 10-year Treasury Note. With that in mind, it’s always timely to take a fresh look at what financial economics tells us about projecting the equity risk premium. As a preview, there’s still precious little that’s new under the sun in strategic terms. Yet researchers keep chipping away at the nuances of asset pricing, and every now and then they turn up intriguing and perhaps useful clues for peeling away another layer of uncertainty in projecting risk premiums.
Monthly Archives: March 2010
NO EASY ANSWERS IN THE AGE OF EASY MONEY
The key phrases in today’s FOMC statement from the Fed in reference to the outlook for interest rates: “exceptionally low” and “extended period.” Almost no one expected a change from the current zero-to-0.25% Fed funds target, although there was speculation that the wording might change. Not so. Bernanke and his crew want it understood that they’re going to keep rates low for quite a while, and they really do mean it.
ANOTHER FOMC DAY
Will they hike ’em today? Probably not. But the sight of a central bank raising interest rates is no longer unusual. Australia has been hiking the price of money recently and South Korea is reportedly set to begin its exit strategy. The Fed isn’t likely to join them today. The formal yeah or nay arrives this afternoon, when the FOMC releases a statement. But the aura of tightening hangs in the air.
DODD’S REGULATIONS
Sen. Dodd’s new financial regulation package is out and about. What does it mean? What does it do? What will it change? Will it work? The analysis has only just begun. We can start by recognizing that the Dodd legislation aims to add “layers of oversight.” It’s already delivered layers of paper (the actual bill is 1,336 pages).
IS A TRADE WAR BREWING?
Chinese Premier Wen Jiabao yesterday firmly rejected calls for a stronger yuan, which is widely credited for boosting the country’s exports and maintaining its enormous trade surplus. “The Chinese currency is not undervalued,” he said on Sunday in Beijing. “We oppose all countries engaging in mutual finger-pointing or taking strong measures to force other nations to appreciate their currencies.”
The Chinese have been asserting for some time that revaluing the currency was a non-starter. Earlier this month, China’s central bank chief said as much, as we discussed here. Wen’s comments yesterday only strengthen his country’s resolve.
A TAXING EXPERIMENT
Supply side economics guru Arthur Laffer co-authored a book recently whose title is anything but subtle: The End of Prosperity: How Higher Taxes Will Doom the Economy–If We Let It Happen
A BIT MORE CONSUMPTION IN FEBRUARY
Retails sales last month rose 0.3%, the Census Bureau reported this morning. That’s an upside surprise compared to the consensus outlook, which predicted a 0.3% fall. So much for the idea that snow can keep consumers away from the malls, even if the weather was blamed for pinching the labor market last month.
OBAMA WILL NOMINATE JANET YELLEN AS FED VICE CHAIRMAN
The Wall Street Journal this morning is reporting that Janet Yellen is on the fast track to become the central bank’s second-in-command replacement for the retiring Don Kohn.
NO, WE’RE NOT MAKING THIS UP…
Greece has economic troubles, and the extent and breadth of those troubles only seems to worsen the more the outside world learns of what makes this country tick.
WAITING (HOPING) FOR THE FLOOR TO GIVE WAY
The jury’s still out on the path of least resistance in the trend for initial jobless claims. Today’s weekly update is certainly a step in the right direction, although last week’s meager drop in new filings for jobless benefits falls far short of stellar, or convincing. The sluggish behavior of late in this series has kept us anxious for more than a month, and the number du jour doesn’t change much.