Expectation Nation

What do you think the market will do?

I get that question all the time, especially this time of year. And it’s reasonable to ask someone who makes his living dealing with the ups and downs of the Dow and interest rates whether he thinks next year’s markets will behave like Santa Clause or the Grinch.

In the long-run, markets are moderately predictable. Bonds are actually very predictable. If you buy a 10-year Treasury bond at a yield to maturity of 2.9%, you can confidently expect that you will receive about 30% over 10 years. (That extra 1% is due to reinvesting the coupon payment.) Low yields lead to low returns. Conversely, high yields lead to high returns.

How about stocks? The data is less decisive, but still indicates that valuation matters. Cyclically adjusted earnings yield is positively associated with returns—especially when the market is at an extreme—as it was in 2009 or 2007. But even in times of normal valuation—which is what I would maintain we are in right now—there’s a positive correlation. But the data is messy. Equities are a residual claim on a volatile earning stream, and subject to manias and panics. Still, low valuations lead to higher returns, and vice-versa, over the medium to long run.

But what do I think the market will do next year? Short-term data are much less dependable. Stay diversified! Diversification is the compliment that humility pays to uncertainty. We don’t know the future. We can only plan for volatility.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-12-13T14:32:44+00:00 December 13th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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