Causes of Deviations from a Real Earnings Yield Model of the Equity Premium
Austin Murphy and Zeina N. Alsalman (Oakland University)
October 2023
A market-based forecast of inflation added to equity earnings yields explains much of the variation in stock market returns over multi-year horizons. Return deviations from the prediction are found to be negatively related to the current inflation rate (output gap) over annual (all) horizons. Existing inflation is discovered to be positively (negatively) associated with future higher interest rates (real money supply and long-term profit growth). However, long-term inflationary expectations are positively correlated with long-term real future profit growth and stock returns. These results support the hypothesis of equity returns being positively (negatively) related to inflation (countercyclical anti-inflationary policies).
Author Archives: James Picerno
Macro Briefing: 17 November 2023
* US soft landing for economy possible, says Fed Governor Lisa Cook
* Fed may cut rates as soon as March: Wharton professor Jeremy Siegel
* Avoiding China has been a winning strategy for emerging-markets investing
* Industrial production fell in October, driven lower by worker strikes
* US homebuilder sentiment in November drops to 11-month low
* US jobless claims rise to three-month high:
US Q4 GDP Outlook Appears On Track For Modest Growth
US economic activity in the fourth quarter remains set for a sharp slowdown vs. Q3, but the pace of expected growth has strengthened recently, based on updated nowcasts.
Macro Briefing: 16 November 2023
* Five key takeaways from Biden-Xi meeting
* US will avoid gov’t shutdown as Senate sends funding bill to Biden
* Wholesale prices in US fell 0.5% in October–biggest drop since April 2020
* NY Fed Mfg Index: regional business activity grew “modestly” in November
* Business inflation expectations steady at 2.5% in November
* US retail sales fell in October–first monthly decline since March:
10-Year US Treasury Yield ‘Fair Value’ Estimate: 15 November 2023
Today’s “fair value” estimate of the US 10-year Treasury yield continues to suggest that the current market rate is unusually lofty and that the spread will soon narrow. Yesterday’s sharp drop in the 10-year yield (triggered by upbeat inflation news for October) suggests that the process of normalizing has started.
Macro Briefing: 15 November 2023
* House passes bill to avert government shutdown
* Presidents Joe Biden and Xi Jinping will meet today in San Francisco
* Odds appear to rise for US soft-landing economic scenario
* China retail sales and industrial output in Oct rise more than expected
* More disinflation pressure expected for housing, expert predicts
* US consumer inflation eased in year-over-year terms through October:
Desperately Seeking Yield: 14 November 2023
Current yields for the major asset classes edged higher recently, based on a set of proxy ETFs through the close of trading on Monday, Nov. 13.
Macro Briefing: 14 November 2023
* House to consider stopgap spending plan to avoid government shutdown
* US forces attacked four times in Syria since US military strikes on Sunday
* World economy will top expectations in 2024: Goldman Sachs
* Oil demand remains strong despite recent price weakness, says OPEC
* World oil supply growth is exceeding expectations: IEA
* Markets shrug at warning of ratings outlook downgrade for Treasurys
* Exxon plans to become major lithium supplier for electric vehicles
* UBS expects Fed rate cuts in 2024 as policy-sensitive 2-year yield eases recently:
Globally Diversified Portfolios On Track For Solid 2023 Gain
On paper, the set-up sounds toxic. An ongoing war on Europe’s eastern border, a new conflict in the Middle East that could turn into a regional battle, and sharply higher interest rates to combat inflation. It doesn’t sound like the conditions that are conducive to robust gains, but year-to-date results for global portfolios suggest otherwise.
Macro Briefing: 13 November 2023
* US launches more strikes on Iran-linked groups in Syria
* House GOP unveils plan to avoid a government shutdown
* Moody’s cuts US credit outlook to ‘negative’ despite reaffirming AAA rating
* China consumption rebound slowed, business confidence lost momentum in Oct
* US and Indonesia discuss possible deal on electric-vehicle minerals
* Foreclosures surge in risky corner of commercial property market
* Renewable energy firms suffering a rough earnings season
* US Consumer Sentiment Index falls for fourth straight month in November:
