The yield of an asset is a key component of predicting future returns. This is true for the yield on Treasury bonds as well as the dividend yield for stock indexes. The yield on aggregate bond indexes is considered a good proxy for future expected returns. The dividend yield of broad stock indexes has been shown to provide significant value in predicting future stock index returns. In both cases, low yields tend to predict high future returns, and vice versa. These arguments that yields predict returns are not without critics, especially for equities. Continue reading
In general, I ignore the spate of market predictions that experts issue at the start of each year. There are exceptions, and after reading Jason Hsu’s outlook for this year, I am pleased to recommend it to readers. Dr. Hsu is the Chief Investment Officer at global money management firm, Research Affiliates. I found his article both insightful and appropriately skeptical of all forecasts. How can you not appreciate a money manager who starts his prediction for the year ahead with John Galbraith’s quip that “the only function of economic forecasting is to make astrology look respectable”?
I am going to mention a few of the elements of Hsu’s outlooks and add some thoughts. Hsu first examines the drivers for bonds and then equities. I will follow this structure. Continue reading
I came across a nice site for looking at the long-term dividend yield for the S&P500. Going back to the late 1800′s, we are currently near historic lows for the dividend yield for the S&P500. Sometimes a picture really is worth one thousand words, and that is the case here.
There are two major reasons why yields could be very low. Continue reading
In any field it’s fascinating to watch what the heavy weights are up to. John Reese, founder and CEO of Validea and Validea Capital Management, (pictured) has spent the last 15 years studying history’s best investors and then building investment strategies based on that research. Among his “gurus”: Warren Buffett, Peter Lynch, Ben Graham and others. In the August 20th, 2010 issue of his newsletter, the Validea Hot List, Reese takes an in-depth look at James O’Shaughnessy, an expert in quantitative stock modeling. O’Shaughnessy’s methods have inspired a Validea strategy which Reese says has averaged more than 8% annualized returns since its inception seven years ago, a period in which the S&P 500 has returned about 1.2% per year.
Below is a reprint of part of Reese’s write-up and a list of current stocks that score highly based on his O’Shaughnessy model. Continue reading