Style Premia for a Low Return World

By Corey Hoffstein via

There is no shortage of diverse opinions on Wall Street: it is, after all, what makes a market function. Yet more and more asset managers are converging in agreement on one important point: we have entered a period of low expected returns in traditional assets.

The view arises from two critical data points: higher-than-average valuations in U.S. equities and low nominal yields in core bonds.

For the former, we can look towards the Shiller P/E, which sits just shy of 30.  In the 95th percentile, prior periods where valuations reached this level include right before the Great Depression and the Dot-Com Bubble.

That is not to say that high P/Es necessarily forecast doom and gloom. Earnings yield (the inverse of P/E), however, is an important input to many expected return models. Higher P/Es imply lower earnings yields, which imply lower expected returns.

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