May

24

Dean Davis notes an interesting study of the earnings yield, bond yield differential as a predictive variable.

Conclusion: The yield gap - the difference between the stock market earnings yield and the long term bond yield - can be interpreted as a simple measure of the yield spread of stocks versus bonds, or a relative long-term rate of return of stocks against bonds. By using the definition of returns, I derive a dynamic accounting decomposition for the yield gap, where it is positively correlated with future stock market returns and negatively correlated with future dividend to earnings payout ratios, growth rate on future equity earnings and future bond returns….


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