An Investigation into the Causes of Stock Market Return Deviations from Real Earnings Yields
Austin Murphy (Oakland University), et al.
December 2024
This research demonstrates that the simple difference between the current earnings yield on the S&P500 and the long-term real TIPS yield has significant forecasting power for excess returns on that stock market index over both short-term and long-term investment horizons. For all time frames, deviations from that theoretical identity for the equity premium are positively related to current economic slack in the economy. Over annual horizons, those excess stock return deviations are negatively (positively) associated with recent inflation rates (money growth). Inflation is found to be positively (negatively) related to monetary policy restrictiveness (long-term real profit growth) in the future.
Macro Briefing: 17 January 2025
US retail sales rose for a fourth month in December, rising by a weaker-than-expected 0.4% vs. the previous month. The Commerce Dept. also revised up November’s sales to a strong 0.8% monthly increase. “The control group, which feeds into calculations of gross domestic product, exceeded estimates, rising by 0.7% for the month,” writes an analyst at RSM. “This increase lifted the group’s three-month annualized average to 5.4%, only slightly lower than the 5.9% recorded in the third quarter.”
10-Year US Treasury Yield ‘Fair Value’ Estimate: 16 January 2025
The market premium for the US 10-year Treasury yield eased in December after rising for two straight months. The analysis uses a “fair value” estimate calculated by CapitalSpectator.com. Despite the downshift, the market continues to price the 10-year yield at a relatively high level compared with the pre-pandemic range.
Macro Briefing: 16 January 2025
US consumer inflation sped up in December, rising 2.9% vs. the year-ago level. The faster pace marks the third straight month that the consumer price index at the headline level picked up. The current rate is the highest since July. The core rate of CPI, by contrast, ticked lower to 3.2%, which is holding within a tight 3%-plus range that’s prevailed recently. “When you step back and look at the overall state of inflation, we’re not really going anywhere,” says Sarah House, senior economist at Wells Fargo. “While there has been progress, the pace has been really disappointing.”
Commodities Are The Upside Outlier So Far This Year
January is shaping up to be a rough month for the major asset classes, with one exception: commodities. Using a set of ETF proxies, a broad measure of commodities is posting a solid gain year to date. In sharp relief, the rest of the field is mostly in the red, with the exception of one market that’s flat, based on trading through Jan. 14.
Macro Briefing: 15 January 2025
US producer price inflation increased to a 3.3% year-over-year level through December. Although that’s below expectations, it’s also the fastest pace since Feb. 2023. “Better than expected is not necessarily what the Fed wants to see before easing monetary conditions into a fast-growing economy, with tariffs and tax cuts on the agenda of the incoming administration,” says Carl Weinberg, chief U.S. economist at High Frequency Economics.
US Q4 GDP On Track To Post 2%-Plus Growth
The US economy is still expected to post a slower growth rate in the upcoming fourth-quarter GDP report. But in a sign of confidence that a respectable expansion persists, the projected rate of expansion picked up in today’s nowcast vs. the previous estimate.
Macro Briefing: 14 January 2025
The US 10-year Treasury yield continues rising, trading at 4.79% on Monday, the highest since early November 2023. “Bond investors are sending a clarion call to the world’s fiscal authorities to get a grip on their budget trajectories, lest they be subjected to additional wrath,” says Tony Crescenzi, an executive vice president at Pimco.
2024 Ends With Resilient US Payrolls Data
The US economy added more jobs than expected in December, providing a fresh dose of optimism that the labor market will remain strong for the near term. There’s lots of uncertainty ahead as Trump 2.0 is set to get underway, but it’s fair to say that the incoming administration inherits a labor market that’s humming.
Macro Briefing: 13 January 2025
China’s trade surplus surged to nearly $1 trillion in 2024. Driven by strong exports, the news arrives ahead of expected US policy changes on import tariffs after President-elect Trump moves into the White House on Jan. 20. The New York Times reports: “When adjusted for inflation, China’s trade surplus last year far exceeded any in the world in the past century, even those of export powerhouses like Germany, Japan or the United States. Chinese factories are dominating global manufacturing on a scale not experienced by any country since the United States after World War II.”
