With current dividends yields historically low, expectations for slower earnings growth ahead, and lofty multiples, Arnott doubts a continuation of
the past equity premium.
Not exact matches
In the
past, companies have viewed instances of strong
equity markets as an opportunity to take advantage of their highly valued stock to make acquisitions or as an opportune time to fetch a good
premium for shareholders by being acquired.
Estimates of the future
equity risk
premium should start with historical results and then adjust for expected shifts in stock market variability and non-repeatability of unusual
past cash flows.
The proposed momentum underlay chooses SPY, iShares S&P 500 Value (IVE) or iShares S&P 500 Growth (IVW) based on highest five - month
past return whenever the
equity risk
premium is most undervalued.
When everyone believes in the inevitability of stocks, à la «Dow 36,000» (we'll get there by 2025 or so),
equity valuations are high,
past equity performance has probably been great, and the future
equity premium is small — think 1929, 1972, August 1987 and February 2000.
Equity risk
premium bears argue that so much of these
past stock returns have been driven by increases in earnings and dividend multiples, it would be nearly impossible for a further expansion in these to contribute to future returns.