That's not necessarily a poor expectation over the short - term, but long - term yields appear increasingly compressed because of default concerns and a flight - to - safety, so that even TIPS prices now include a
somewhat speculative component.
I do believe that yields and prospective returns on stocks and bonds are likely to be correlated in strong inflation - disinflation cycles, but prospective equity returns have a far larger and more
variable speculative component than investors seem to appreciate.
I prefer to use Professor Robert Shiller's P / E10 when calculating
the speculative component.
[Adjustments for
the speculative component do not resolve this paradox.
Although the portion of returns originating from
the speculative component in both of these cases may seem high, it's actually what you'd expect from a large sample of stocks.
The speculative component of last year's price return therefore made up about 70 percent of the total gain.
So
the speculative component contributed about 80 percent of its roughly 50 percent gain.
The risk at present is that
this speculative component is highly correlated with US markets, and that correlation has been rising over the last two decades.
The speculative component rose above 100 percent during the 2008 - 2009 bear market, when the drop in valuation multiples made up the entire loss in share value, on average.
The graph shows the stocks in the bottom 20 %, ranked by price to sales ratio, have generated nearly all of their returns from
the speculative component.
As a number of other analysts have pointed out, there has been a growing divergence between the fundamental component and
the speculative component of European stock market returns.
And finally, it is impossible to forget
the speculative component.
Now there is
a speculative component to all this.