Larry Swedroe: Consumption’s Impact On Returns

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Random Walker
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Larry Swedroe: Consumption’s Impact On Returns

Post by Random Walker » Sun Feb 11, 2018 10:29 am

http://www.etf.com/sections/index-inves ... ct-returns

Aggregate Consumption decreases in bad economic times and increases in good economic times. Here Larry reviews a paper showing that the expected return on equities increases during periods of low consumption and decreases during periods of higher consumption. Good reminder to stick with the plan; when things look bad is when expected returns increase. The market prices risk. When things get ugly, the perception of risk increases, equity prices fall, and expected equity returns rise.

Dave

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nedsaid
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Re: Larry Swedroe: Consumption’s Impact On Returns

Post by nedsaid » Sun Feb 25, 2018 12:09 am

One big factor with cyclical consumption is the idea of pent up demand. A good example of this is the US Auto industry. There is a huge fleet of cars and trucks owned by Americans and we depend upon them for our transportation. Vehicles wear out. In bad times, consumers can put off vehicle replacement. They just keep having the needed repairs done at the shop spending money a bit at a time rather than all at once with a new vehicle purchase. But eventually those vehicles need replacement, you can put off the process only so long. So the longer people put off replacing their car or truck, the stronger the rebound in the auto market when the economy turns around.

We are also seeing this in the housing market. Household formation was delayed by the Great Recession in the aftermath of the 2008-2009 financial crisis. The old living in the parent's basement thing. Now younger people are getting good jobs again and are looking for their first home.
A fool and his money are good for business.

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patrick013
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Re: Larry Swedroe: Consumption’s Impact On Returns

Post by patrick013 » Sun Feb 25, 2018 3:18 pm

https://myphotos.mypclinuxos.com/images ... ce2016.png

Although the correlation is high the graph doesn't exactly look like it.
Looks like steady upward growth in PCE while ignoring stock market
profit recessions.
age in bonds, buy-and-hold, 10 year business cycle

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cfs
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Re: Larry Swedroe: Consumption’s Impact On Returns

Post by cfs » Sun Feb 25, 2018 4:04 pm

Thank you Mister Dave for the links to Mister Swedroe's articles, always good read.

Mister Swedroe is no longer active in this forum [for good reasons], please continue posting links to his article and I will continue reading them.

Muchas gracias por leer ~cfs~
~ Member of the Active Retired Force since 2014 ~

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packer16
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Re: Larry Swedroe: Consumption’s Impact On Returns

Post by packer16 » Sun Feb 25, 2018 4:29 pm

It would be interesting to hear Larry's & others thoughts on Damodaran's forward looking ERP data based upon the 10-year bond rate, as shown on his site. The ERP is the incremental return of holding stocks versus bonds. This data overcomes some of the CAPE weaknesses like lack of normalization to interest rates & incorporation of buybacks. There is a nice summary of the past week on his blog:

http://pages.stern.nyu.edu/~adamodar/

This is the counter narrative for the need for alternatives because forward equity returns will be low. He states the current ERP is close to the average, Pretty convincing IMO & backed up by analysis in his annual ERP paper on the page above.

Packer
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matjen
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Re: Larry Swedroe: Consumption’s Impact On Returns

Post by matjen » Mon Feb 26, 2018 12:57 pm

packer16 wrote:
Sun Feb 25, 2018 4:29 pm
It would be interesting to hear Larry's & others thoughts on Damodaran's forward looking ERP data based upon the 10-year bond rate, as shown on his site. The ERP is the incremental return of holding stocks versus bonds. This data overcomes some of the CAPE weaknesses like lack of normalization to interest rates & incorporation of buybacks. There is a nice summary of the past week on his blog:

http://pages.stern.nyu.edu/~adamodar/

This is the counter narrative for the need for alternatives because forward equity returns will be low. He states the current ERP is close to the average, Pretty convincing IMO & backed up by analysis in his annual ERP paper on the page above.

Packer
Haven't read it yet but I know Larry holds Damodaran in high regard. Having said that, I don't think the argument for alternatives is that equity returns are likely to be low but rather that equity AND bond returns are likely to be low. And, of course, the obvious increased diversification argument.
A man is rich in proportion to the number of things he can afford to let alone.

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