![]() ![]() The Fed is slowly waking up to the new neutral and added that the Fed is “basically on hold going forward.”.He sees real bond yields of 1% to 1.5% and short-term yields at zero.Interest rates are low for fundamental reasons – not the Fed.He added: Economic growth and risk aversion are the most important determinants of real returns.This was a nice reminder from the professor: He said the only time we saw PEs below 10 was when interest rates were in the double-digits.Adding, we are on the high side of normal. He emphasized that is 5% better than bonds. A PE of 18x forecasts a real return of 5.6% for stocks.Oil was an $8 hit and the strong dollar a $5 hit. Earnings yield is the best predictor of real stock market returns over the long run.S&P 500 was 30x and the NASDAQ was 600x in March 2000. A 15x trailing 12-month PE is the average for the long-run.We are not today way out of line with valuations – high but not bubble high.It is about 5½% for the balance of the world.equity market cap weighted real return (after adjusting for inflation). We are entering a period of low returns for all asset classes.One of biggest gaps between supply and demand ever. ![]() Pensions and Endowments will need to sell if not A or better rating. When bonds are downgraded they don’t rally.
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