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If you have been reading my posts, you know that I have an obsession with equity riskpremiums, which I believe lie at the center of almost every substantive debate in markets and investing. That said, I don't blame you, if are confused not only about how I estimate this premium, but what it measures.
In most time periods, those recalibrations and resets tend to be small and in both directions, resulting in the ups and downs that pass for normal volatility. Clearly, we are not in one of those time periods, as markets approach bipolar territory, with big moves up and down.
I will follow up by looking at the mechanics that connect stock prices to inflation, and examine why the damage from higher inflation can vary across companies and sectors. The Year in Review At the start of 2022, the S&P 500 was at 4766.18, up from 3756.07 at the start of that year. Stocks: The What?
In my early 2021 posts on inflation, I argued that while the higher inflation that we were just starting to see could be explained by COVID and supply chain issues, prudence on the part of policy makers required that it be taken as a long term threat and dealt with quickly. in the NY Fed survey. in the NY Fed survey.
The US treasury market, considered by some still as a safe haven, was anything but safe or a haven, especially at the long maturities, as long term rates soared, with inflation (not the Fed) being the key driver. That is good advice in most years, but 2022 was not one of those years.
We started the year with significant uncertainty about whether the surge in inflation seen in 2022 would persist as well as about whether the economy was headed into a recession. The NASDAQ also gave back gains in the third quarter, but is up 27.27% for the year, but those gaudy numbers obscure a sobering reality.
At the start of the year, the consensus of market experts was that this would be a difficult year for markets, given the macro worries about inflation and an impending recession, and adding in the fear of the Fed raising rates to this mix made bullishness a rare commodity on Wall Street.
While stocks had their ups and downs during the year, they ended the year strong, and recouped, at least in the aggregate, most of the losses from 2022. Stocks ended the year well, with November and December both delivering strong up movements, and while this left investors feeling good about the year, it was a rocky year.
Inflation: Measurement and Determinants As the inflation debate was heating up in the middle of last year, I wrote a comprehensive post on how inflation is measured, what causes it and how it affects returns on different asset classes. Rather than repeat much of that post, let me summarize my key points.
In this post, I will argue that almost everything that we are observing in markets, across asset classes, can be explained by a pull back on risk capital, and that understanding the magnitude of the pull back, and putting in historical perspective, is key to gauging what is coming next. Risk Capital: What is it?
As we start 2024, the interest rate prognosticators who misread the bond markets so badly in 2023 are back to making their 2024 forecasts, and they show no evidence of having learned any lessons from the last year. The Fed Effect: Where's the beef?
In this post, I offer an alternative, albeit a more complicated, metric that I believe offers not only a more comprehensive measure of pricing, but also operates as a barometer of the ups and downs in the market. Note that nothing that I have said so far is premised on modern portfolio theory, or any academic view of riskpremiums.
The first has been the steep rise in treasury rates in the last twelve weeks, as investors reassess expected economic growth over the rest of the year and worry about inflation. for the year are at war with its concurrent promise to keep rates low; after all, adding those numbers up yields a intrinsic risk free rate of 8.7%.
As I have argued in all four of my posts, so far, about 2022, it was year when we saw a return to normalcy on many fronts, as treasury rates reverted back to pre-2008 levels, and risk capital discovered that risk has a downside.
In my last post , I described the wild ride that the price of risk took in 2020, with equity riskpremiums and default spreads initially sky rocketing, as the virus led to global economic shutdowns, and then just as abruptly dropping back to pre-crisis levels over the course of the year.
In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low risk free rates (with the treasury bond rate at 0.93% at the start of 2021). The year that was.
It has been my practice for the last two decades to take a detailed look at how risk varies across countries, once at the start of the year and once mid-year. Country Risk: Default Risk and Ratings For investors, the most direct measures of country risk come from measures of their capacity to default on their borrowings.
I took this estimation process for granted until 2008, when during that crisis, I woke up to the realization that no matter what the text books say about risk-free investments, there are times when finding an investment with a guaranteed return can become an impossible task. and the reverse will occur, when risk-free rates drop.
Looking at US equities, the S&P 500 is up about 11% and the NASDAQ about 5%, from start of the year levels, and the underperformance of the latter has led to a wave of stories about whether this is start of the long awaited comeback of value stocks, after a decade of lagging growth stocks.
The Lead In To understand the market effects of the Russia-Ukraine conflict, we need to start with an assessment of the two countries, and their places in the global political, economic and market landscape, leading in. Ukraine, a part of the Soviet Union, has had its shares of ups and downs, and its economic footprint is even smaller.
The second was that, starting mid-year in 2020, equity markets and the real economy moved in different directions, with the former rising on the expectations a post-virus future, and the latter languishing, as most of the world continued to operate with significant constraints.
In the weeks since, the administration has come up with its follow-up proposal, this one funded by increases in individual taxes, primarily on the wealthy. On capital gains, the same argument can be made, but it is less direct, since stock prices can go up, even if a company is money-losing and has no taxable income.
To start the year, I returned to a ritual that I have practiced for thirty years, and that is to take a look at not just market changes over the last year, but also to get measures of the financial standing and practices of companies around the world. Happy New Year, and I hope that 2022 brings you good tidings! Sometimes, less is more!
In my last post , I noted that the US has extended its dominance of global equities in recent years, increasing its share of market capitalization from 42% in at the start of 2023 to 44% at the start of 2024 to 49% at the start of 2025.
It is the end of the first full week in 2025, and my data update for the year is now up and running, and I plan to use this post to describe my data sample, my processes for computing industry statistics and the links to finding them. Beta & Risk 1. Equity RiskPremiums 2. Return on Equity 1. Debt Details 1.
We started 2024 with the consensus wisdom that rates would drop during the year, driven by expectations of rate cuts from the Fed. In this post, I will begin by looking at movements in treasury rates, across maturities, during 2024, and the resultant shifts in yield curves.
Since country risk is multidimensional and dynamic, my annual country risk update runs to more than a hundred (boring) pages , but I will try to summarize what the last year has brought in this post. Drivers of Country Risk What makes some countries riskier than others to operate a business in?
In the first five posts, I have looked at the macro numbers that drive global markets, from interest rates to riskpremiums, but it is not my preferred habitat. The second set of inputs are prices of risk, in both the equity and debt markets, with the former measured by equity riskpremiums , and the latter by default spreads.
I pointed to the flaw in the logic, but the comments thereafter suggested such deep confusion about what returns on equity or capital measure, and what comprises an efficient market, that I think it does make sense to go back to basics and see if some of the confusion can be cleared up.
After the 2008 market crisis, I resolved that I would be far more organized in my assessments and updating of equity riskpremiums, in the United States and abroad, as I looked at the damage that can be inflicted on intrinsic value by significant shifts in riskpremiums, i.e., my definition of a crisis.
The results, broken down broadly by geography are in the table below: As you can see, the aggregate market cap globally was up 12.17%, but much of that was the result of a strong US equity market. I aggregated the market capitalizations of all stocks at the end of 2023 and the end of 2024, and computed the percentage change.
I will start with a couple of confessions. Thus, my estimates of equity riskpremiums, updated every month, are not designed to make big statements about markets but more to get inputs I need to value companies.
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