Sep 28, 2021
Yields On Stocks Currently Produce Negative Real Returns: Will This Continue?
Investors Are Currently Coping With The Lowest Real Returns Since The 1970s.
The real earnings plus dividend yield of US equities have fallen below the rate of inflation for the first time since the mid-1970s. It is noteworthy that the 1970s event preceded a very sharp decline by stock markets.
The factors that have produced the current negative return environment: negative real interest rates and stock markets driven to valuation peaks by unjustified investor expectations are major reasons why we view the current risk/reward prospects offered by markets as poor.
The resolution of this problem must involve either a sharp decline by stock markets or an increase in interest rates. The most likely result will be some combination of both. Any scenario will likely eventually produce a significant market decline.
Both macro and micro considerations suggest that we can anticipate a return to higher volatility investing environment, following the unusually low volatility exhibited by markets over the past decade. Higher volatility will present considerable risks for the unwary but also great opportunities for the prepared investor.
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