Barry Ritholtz reminds me again of the folly of predictions. On one hand,
[the] bears have been saying for some time now that stocks are at best fully valued, meaning there isn’t much room for gains after equities more than tripled from their March 2009 lows. The ursine argument is that low future returns are a given, and an ugly crash is the worst-case scenario.
The bulls argue that ultralow inflation allows for higher valuation metrics based on price-earnings ratios or Shiller’s CAPE (cyclically adjusted P/E). Compared with all historic medians, these measures are rather high. But compared with similar eras of very low rates and very low inflation, they are quite reasonable.
The chart below gives a series of S&P 500 forecasts based on current indicators.
Barry drove home the key message best:
…I have found that many investors focus on the implied 10-year annualized returns, rather than upon the range embodied by the 90 percent confidence interval.
Focusing on a range allows us to recognize that several factors remain unknown at present. These are crucial in determining future equity valuations.
Thara — It is easy to focus on a specific number as the expected outcome. However, when dealing with uncertain future, it is worth remembering that there are a range of possible outcomes, and we should make decision based on probability of each outcome.
So far this year, investing in the S&P 500 index would have achieved an abysmal return of 2.26 percent. So there is no surprise that there is no shortage of pundits calling for a market crash in 2015 like this one. Since it is almost half way through 2015, it is worth reexamining such claim. Should we worry about it?
After 40 years, Apple (AAPL) is finally added into the Dow Jones Industrial Average, a nearly 120-year-old index. Getting booted out is AT&T (T), a telecommunication company based in Dallas, Taxas. So, one might ask why did it take the index editors a long time to include Apple, a company of $740 billion market capitalisation?
Barry Ritholtz posted an interest working paper today. What I found in the summary is quite interesting:
We find that HFT order flow is more correlated over time than that of the investment banks, both within and across stocks. This means that HFT firms tend more than their peer investment banks to buy or sell aggressively the same stock at the same time. Also, a typical HFT firm tends to simultaneously aggressively buy and sell multiple stocks at the same time to a larger extent than a typical investment bank.
What is a possible impact in term of market efficiency?
We find that instances of correlated trading by HFT firms are associated with a permanent price impact whereas correlated trading by investment banks is associated with only a temporary price impact. We interpret this as evidence that HFT correlated trading is information-based; in other words, HFT firms appear to be reacting simultaneously and quickly to new information as it arrives at the market place, which makes prices more efficient. This suggests that correlated trading by HFT firms does not appear to contribute to undue price pressure and price dislocations on a systematic basis in the UK equity market.
Thara – Quite an interesting defence of HFT. As the authors noted, this paper does not address the issue of HFT activities during the period of high stress such as the Flash Crash on May 6, 2010. What they show is that HFT firm can be quite effective in removing any price disparities.
If you have one and a half hour to spare, this interview is worth listening to.
One message stands out:
Don’t be afraid of a recession. They are crucial parts of healthy, ever evolving economy.
From Ritholtz.com: Achuthan is the Co-Founder & Chief Operations Officer of ECRI, managing editor of ECRI’s forecasting publications. He is also a member of Time magazine’s board of economists and the Levy Institute’s Board of Governors. He is the author of Beating the Business Cycle: How to Predict and Profit From Turning Points in the Economy.
FT article: Bonds: Anatomy of a market meltdown
Is the bond market becoming increasingly volatile? If so, what are ramifications on your portfolio/superannuation with large bond holding. It seems nothing in the financial world is as safe as people tend to think.
Bob Farrell’s rule #9: When all the experts and forecasts agree, something else is going to happen.