At the beginning of the year there was a heated debate among economists and financial analysts on whether the long U.S. economic expansion would finally come to an end this year. A number of predictive models were showing that the probability of recession was rising to levels associated with a significant deceleration of economic activity in the past. As the COVID-19 virus is a tremendous exogenous shock with potentially long-lasting repercussions, it is rather safe to assume that the severe do...
Regional or country allocations are one of the primary decisions that asset allocators need to actively take. Especially within the developed market universe it is certainly not a straightforward one, due to the leading position of the U.S. equity market and its significance for other equity markets.A most striking observation, however, is the relative outperformance of the U.S. equity market during the last decade.
One of the primary questions that investors should be asking at all times is whether risks are realistically and adequately priced in financial markets. It is true that the pricing of risk is definitely not a straightforward exercise and thus there are numerous instances that investors have been consistently mispricing risks. Typically, periods of prolonged mispricing have been followed by a re-evaluation of expectations and a rise in asset market volatility. Investors have exhibited less risk ...
It seems that equity markets have priced-in a rather optimistic scenario both with respect to the projected macroeconomic and earnings backdrop. In order to get a feeling of the impact of current market expectations on equity market valuation, an econometric framework is employed to proxy and determine the ‘fair value’ of the market.
2018 was undoubtedly the most intense period of monetary policy tightening post the Global Financial Crisis, as the number of rate hikes exceeded that of rate cuts. Year to date, last year’s aggressive tightening trend has come to an end, as the pace of monetary tightening has decelerated considerably. Numerous economists and market analysts have been taking the view that the global monetary policy stance will shift back to easing relatively soon.
While numerous economists and strategists have been trying to forecast the end of one of the longest economic expansions on record, a, more or less, radical theory has emerged recently. J.P. Morgan chief U.S. equity strategist Dubravko Lakos-Bujas claims that thinking in terms of ‘traditional’ business cycles might not be relevant anymore. At the crux of his theory is that the ongoing cycle is not a typical one, as it is continuously influenced by central bank actions, thus one should not consid...
That financial conditions are crucial for projected economic activity and monetary policy is nothing new. Numerous monetary policy makers have stressed the importance of financial conditions in the conduct of monetary policy. There is also empirical evidence that shows that financial conditions contain information about the current and, more importantly, the future state of the economy. In this context, we decided to explore further the relation between core inflation and financial conditions by...
In their effort to identify the arrival of business cycle turning points, economists employ models that estimate the chance of recession over different time horizons and using a variety of economic and financial factors as explanatory variables. The prediction model of reference has been that using the spread of long-dated over short-dated yields, as the unique explanatory variable, given its consistent predictive power over time.In an attempt to explore the prognostic ability of the univariate ...
The probability that the U.S. economy’s lengthy expansion will eventually come to an end in 2020 continues to be one of the prevailing themes in financial markets that cause investor concern. Is it warranted? Reality is that numerous U.S. macroeconomic indicators have been trending lower lately.What is the current probability of an economic recession on a 12-month horizon?
As extensive empirical studies have shown that valuation metrics explain a sizeable portion of the variation in expected equity returns, it is only rational to use them in forming reasonable long-run expectations. As U.S. equity valuation has been persistently high over the last years, supported primarily by accommodative monetary policy, strong earnings growth and contained risk aversion, there are numerous analysts that expect that they will eventually mean revert. It is, however, difficult to...
Abundant liquidity, low interest rates, and more recently ample earnings growth has made possible the sustainability of relatively high valuations! The report explores where have recent developments left U.S equity market valuations, and, more importantly, to what extent are they sustainable?
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