Investing Research Articles

…the high correlation between equity yield and bond yield derives rationally from the tendency for inflation to be elevated during recessions, such that both equity and bond premiums are relatively high during recessions.

In their June 2003 paper entitled “A General Theory of Stock Market Valuation and Return”, Christophe Faugere and Julian Van Erlach contend that past stock returns are overstated and develop a market valuation formula that out-fits the Fed Model. Specifically, they show that:

What is the historical relationship between U.S. stock market earnings yield (E/P) and U.S. government bond yield (Y)? In their February 2018 paper entitled “Stock Earnings and Bond Yields in the US 1871 – 2016: The Story of a Changing Relationship”, Valeriy Zakamulin and Arngrim Hunnes examine the relationship between E/P Y over the long run, with focus… Keep Reading

…investors seem to have left the Fed model for dead.

How does the Cyclically Adjusted Price-to-Earnings ratio (CAPE, or P/E10) behave during the COVID-19 pandemic? What are its current implications? In the November 2020 revision of their paper entitled “CAPE and the COVID-19 Pandemic Effect”, Robert Shiller, Laurence Black and Farouk Jivraj examine behavior of CAPE during 2020 in the U.S., UK, Europe, Japan and… Keep Reading

…while changes in bond yields have short-term effects on stock prices, valuation ratios better forecast long-term stock market behavior.

We evaluate here the weekly “Ahead of the Curve” columns in SmartMoney.com since August 2001 (the earliest available). The author, Don Luskin, is the Chief Investment Officer for Trend Macrolytics LLC. The table below quotes forecast highlights from the cited source and shows the performance of the S&P 500 Index over various numbers of trading days… Keep Reading

What aggregate return thresholds are critical to investors in deciding whether to accept or reject equity and bonds for investment portfolios? In their December 2008 paper entitled “A Required Yield Theory of Stock Market Valuation and Treasury Yield Determination”, Christophe Faugere and Julian Van Erlach argue that investors first require that U.S. stocks and bonds… Keep Reading

Is there a way to enhance the ability of the cyclically-adjusted price-to-earnings ratio (P/E10 or CAPE) to predict U.S. stock market returns by incorporating real interest rates? In their June 2017 paper entitled “Improving U.S. Stock Return Forecasts: A ‘Fair-Value’ Cape Approach”, Joseph Davis, Roger Aliaga-Diaz, Harshdeep Ahluwalia and Ravi Tolani introduce “fair-value” CAPE that accounts for a… Keep Reading

…investors may be able to use the Fed Model to enhance risk-adjusted returns via reduced portfolio volatility.