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Useful Article by John Cochrane Re: Changing Stock Market Valuations

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  • Useful Article by John Cochrane Re: Changing Stock Market Valuations

    Booth professor John Cochrane wrote a useful blog post regarding stock market valuations, prospective returns, and volatility. Though there isn't actually anything new here (for finance grads, economists, equity analysts, and the like), the article provides a helpful perspective on recent price swings and the factors that drive them (not just now, but always).

    I thought the timeless utility of the post might appeal to many here.

    On the other hand, if you aren't familiar with dividend discount models or the difference between real rates and nominal rates, then there will be plenty new here. You have all the intellectual horsepower you need, it will just take you a little longer to read the post.


    Edit: An excerpt might be helpful:

    "We are at the late summer of the business cycle. The economy is relatively healthy, at least if you're a stock market investor. (Many of these own companies.) Economic volatility is still at an all time low. Bonds are still giving pretty atrocious real returns. Yeah, stocks look pretty healthily priced -- as you contemplate your  it looks like the extra return from stocks is pretty low. But what else are you going to do with the money? You can afford a little risk. Contrariwise, the same investors in the bottom of the great recession, with very low  signaling a high risk premium, said to themselves or their brokers, yes, this is a buying opportunity, stocks will likely bounce back. But my business is in danger of closing, my house might get foreclosed, I just can't take any risk right now."

    (Bold italics mine.) Physicians are insulated from the business cycle, so you can benefit from higher risk premiums during a recession, especially if you plan for that.
    Erstwhile Dance Theatre of Dayton performer cum bellhop. Carried (many) bags for a lovely and gracious 59 yo Cyd Charisse. (RIP) Hosted epic company parties after Friday night rehearsals.

  • #2
    Excellent article. Bookmarked it. Thanks.