Forecasting the Long-Term Equity Premium for Asset Allocation
Athanasios Sakkas (U. of Nottingham) and Nikolaos Tessaromatis (EDHEC)
July 12, 2021
Long-term country equity premium forecasts based on a cross-sectional global factor model (CS-GFM), where factors represent compensation for risks proxied by valuation and financial variables, are superior, statistically and economically, from forecasts based on time-series prediction models commonly used in academia and practice. CS-GFM equity premium forecasts produce significant utility gains compared to long-term asset allocation strategies based on eighteen commonly used prediction models, consistently across the US and ten developed equity markets.
Macro Briefing: 16 July 2021
* Catastrophic flooding in Germany has killed at least 93 people
* US set to warn companies about Hong Kong’s ‘deteriorating’ situation, Biden says
* Treasury Sec. Yellen expects ‘several more months of rapid inflation’
* Yields are low despite high inflation due to liquidity, says bond manager
* Corporate debt ratings upgraded at brisk pace as economy recovers
* US industrial output rose in June but mfg component slipped
* US import prices post another strong gain in June
* The auto market is hot as shortage of computer chips limit supply
* NY Fed Mfg Index surges to record high in July
* US jobless claims fell to a new pandemic low last week:
The ETF Portfolio Strategist: 15 July 2021
Last Friday’s pop in the 10-year Treasury yield was cited by some analysts as the end of the recent slide. But this week’s trading so far through Thursday (July 15) suggests otherwise.
Modeling US Stock Market Expected Returns, Part I
In recent posts I reviewed several basic applications for generating fair-value estimates for the 10-year Treasury yield, which can be used as a proxy for projecting return. Let’s expand this effort by forecasting performance for the US equity market over a 10-year window. The goal is developing a baseline outlook for a 60/40 US stock/bond portfolio over a 10-year horizon.
Macro Briefing: 15 July 2021
* Fed Chairman Powell still expects US inflation surge to ease
* China GDP rose less than forecast in Q2 but still strong at +7.9%
* Covid infections rising sharply again in US and Latin America
* US Senate passes bill to ban import of products from China’s Xinjiang region
* Delta Airlines reports first profit since pandemic began
* Low and falling yields haven’t slowed the junk bond market this year
* US factory gate prices surged in June, beating expectations:
Is The “Inflation Is Transitory” Narrative Dead?
Consumer inflation in the US remained surprisingly hot in June, the Labor Department reported yesterday. Taken at face value, the numbers raise more doubts about the Federal Reserve’s assumption that the recent inflation surge is temporary. But a closer look at the numbers paints a more complicated profile.
Macro Briefing: 14 July 2021
* Senate Democrats propose $3.5 trillion infrastructure plan
* US Covid-19 cases rising again after months of decline
* Death toll mounts from protests in parts of South Africa
* Global holdings of Chinese stocks and bonds continues to surge
* US oil demand rebounds to pre-pandemic levels
* Europe set to propose plan to sharply cut use of fossil fuels
* US small business sentiment rose to eight-month high in June
* Inflation in UK picks up to 3-year high
* US consumer inflation continued to accelerate in June:
China Stock Market Is This Year’s Downside Outlier
Global equity markets overall are posting gains year to date, with the glaring exception of China, based on a set of US-listed exchange-traded products.
Macro Briefing: 13 July 2021
* Most areas of the country seeing new surge in Covid-19 cases due to variants
* Biden supports Cuban protesters, says Havana should “hear their people”
* More Florida links found in assassination of Haiti’s president
* Pandemic lifts global government debt to highest level since World War II
* Oil markets will remain volatile after breakdown in OPEC talks, IEA predicts
* Microsoft announces that it’s buying cybersecurity firm RiskIQ
* ByteDance put IPO on hold indefinitely after pressure from China regulators
* Benchmark providers consider developing an index of everything
* Baltic Dry Index, a proxy for shipping rates, remains near an 11-year high:
US REITs Led Gainers In Mixed Week For Asset Classes
The major asset classes delivered a wide range of results in last week’s trading (through Friday, July 9), based on a set of proxy ETFs. US real estate investment trusts (REITs) led the winners while stocks in emerging markets and commodities posted sharp losses.