The Most Important Charts For 2023

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Feb. 23, 2023 11:37 AM ET
ACTV
,
AFMC
,
AFSM
,
ARKK
,
AVUV
,
BAPR
,
IVOO
,
IVOV
,
IVV
,
IVW
,
IWC
,
IWM
,
IWN
,
IWO
,
IWP
,
IWR
,
IWS
,
IYY
,
QQQ
,
SPLV
,
SPLX
,
SPMD
,
SPMO
,
SPMV
,
SPSM
,
SPUS
,
SPUU
,
SPVM
,
SPVU
,
SPXE
,
SPXL
,
SPXN
,
SPXS
,
SPXT
,
SPXU
,
SPXV
,
SPY
,
SPYD
,
SPYG
,
SPYV
,
SPYX
,
SQEW
,
SQLV
,
SSLY
,
SSO
,
SSPY
,
STLV
,
SVAL
,
SYLD
,
TMDV
,
TPHD
,
TPLC
,
TPSC
,
UAUG
,
UJAN
,
UMAR
,
UMAY
,
UOCT
,
UPRO
,
USEQ
,
USLB
,
USMC
,
USMF
,
USVM
,
TLT
,
TLH
,
PLW
,
EDV
,
SPTL
,
ZROZ
,
VGLT
,
LGOV
,
SCHQ
,
TFJL
,
TBJL
,
GOVZ
,
TBT
,
TMV
,
IEF
,
SHY
,
TBF
,
TMF
,
PST
,
TTT
,
IEI
,
BIL
,
TYO
,
UBT
,
UST
,
UTWO
,
VGSH
,
SHV
,
VGIT
,
GOVT
,
SCHO
,
TBX
,
SCHR
,
GSY
,
TYD
,
EGF
,
VUSTX
,
FIBR
,
GBIL
,
SPTS
,
VLGSX
,
PRULX
,
VEDTX
,
FBLTX
,
PEDIX
,
TIP
,
VTIP
,
SCHP
,
STIP
,
LTPZ
,
SPIP
,
STPZ
,
TIPZ
,
TIPX
,
TDTT
,
TDTF
,
PBTP
WisdomTree
The Federal Reserve's rate hike campaign over the past year has trimmed this spread to below 2%.
Even during the 1970s and 1980s, when inflation averaged over 6% for two decades, dividend growth kept pace with inflation.
For much of the last decade, equities comfortably outpaced bonds with rates near 0% and little additional yield to be found in riskier fixed income sectors.

courtneyk

By Jeremy Schwartz, CFA; Brian Manby, CFA

Despite recessionary fears and an uncertain path for monetary policy, investors have embraced equity risk to begin 2023. Some measures of the equity risk premium, or the additional return compensation investors require to hold
risky assets (like equities), are now hovering around lows last observed during the middle of the global financial crisis in 2008.

Steno Research recently framed the equity risk premium by analyzing the spread between the earnings yield for the U.S. equity market and those available on U.S. Treasury securities. The Federal Reserve's rate hike campaign over the past year has trimmed this spread to below 2%.

Equity investors now face a unique question. Are bonds a direct threat to equity allocations just because there is meaningful
income back in fixed income
, where investors can earn less volatile
yields?

If so, how long will these yields last? The short end of the yield curve tends to track Fed policy more closely, and the current inversion of the overall curve suggests that today's higher rates are not expected to last over the medium- to longer-term once the Fed pivots to rate
cuts
.

Real Yields Are Key

The Fed has been hiking rates because of inflation. We believe stocks are the best long-term hedge for inflation due to the historical risk premium they have exhibited
above
inflation, but also because companies are able to pass along rising input costs over time to their customers.

This pricing power is evidenced by the long-term earnings and dividend growth of the market, outpacing inflation. Even during the 1970s and 1980s, when inflation averaged over 6% for two decades, dividend growth kept pace with inflation.

Over shorter periods, when the Fed enacts tight monetary policy to combat inflation, stock prices ultimately suffer from higher interest rates, as they did in 2022. But over the long term, equities have innate inflation-hedging characteristics that help compensate for inflationary pressures. For this reason, we view them as real assets.

That compels us to analyze
real
rates and
real
bond yields, as opposed to nominal ones, when we observe different measures of equity risk premiums.

We prefer to compare equity earnings yields (or the reward for investors) over those on risk-free, inflation-indexed bonds, like TIPS in the U.S.

This model of equity risk premium is not a perfect guide for markets, but as Professor Siegel explains in the sixth edition of
Stocks for the Long Run
:

Nevertheless, when earnings yields and real bond yields are at extremes, that often signals a turning point. At the peak of the dot-com bubble in 2000, the earnings yield on stock was just over 3 percent, while the 10-year TIPS bond yielded over 4 percent. This led to an extraordinarily rate negative risk premium (earnings yield minus TIPS yield) and reliably signaled the subsequent decline in equity prices.

By these standards, equity risk compensation is not as dire as implied by the original chart from Steno Research.

Using both trailing and forward S&P 500 earnings yields, less the 10-Year TIPS yield, risk premiums are right at their longer-term averages from the past 25 years.

Contrast this with the tech bubble in 2000, when the earnings yield spread over TIPS turned negative, and it's apparent that today's markets have approximately 500 basis points in additional compensation for U.S. equities relative to TIPS.

S&P 500 Equity Risk Premium (Estimated Earnings Yield – 10-Year TIPS Yield)

S&P 500 Equity Risk Premium (Trailing Earnings Yield – 10-Year TIPS Yield)

For much of the last decade, equities comfortably outpaced bonds with rates near 0% and little additional yield to be found in riskier fixed income sectors. This period became known as the 'TINA' era, suggesting '
T
here
I
s
N
o
A
lternative' to owning stocks when rates are low and yield is scarce.

While there are now some real alternatives—with income back in short-duration fixed income—by historical standards, today's equity risk premium remains quite reasonable relative to inflation-indexed bonds.

Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree's investment strategy team in the construction of WisdomTree's equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book
Stocks for the Long Run
. Jeremy is also co-author of the
Financial Analysts Journal
paper 'What Happened to the Original Stocks in the S&P 500?' He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program
Behind the Markets
on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.

Brian Manby joined WisdomTree in October 2018 as an Investment Strategy Analyst. He is responsible for assisting in the creation and analysis of WisdomTree's model portfolios, as well as helping support the firm's research efforts. Prior to joining WisdomTree, he worked for FactSet Research Systems, Inc. as a Senior Consultant, where he assisted clients in the creation, maintenance and support of FactSet products in the investment management workflow. Brian received a B.A. as a dual major in Economics and Political Science from the University of Connecticut in 2016. He is holder of the Chartered Financial Analyst designation.

WisdomTree was the fifth-largest ETF provider in the industry when it launched its first ETFs. WisdomTree Seeking Alpha will feature content from some of our top analysts, including Luciano Siracusano, WisdomTree's Chief Investor Strategist and Head Sales. He co-created WisdomTree’s patented Indexing method with CEO Jonathan Steinberg and has been leading the company's sales team since 2008. Luciano is a frequent guest on FOX Business and CNBC, where he speaks often on ETFs, Indexing, and Global Financial Markets. Luciano, a former Equity Analyst at ValueLine was formerly a speechwriter for Henry Cisneros, the former Secretary of Housing and Urban Development (HUD) Secretary Henry Cisneros. Columbia University awarded him a Bachelor of Arts. He graduated from Columbia University with a B.A. in Political Science in 1987. Jeremy Schwartz, WisdomTree's Director for Research, offers timeless wisdom and timely ideas on a bi-monthly schedule. Before joining WisdomTree, Jeremy served as Professor Jeremy Siegel’s head research assistant. He helped with research and writing Stocks for the Long Run. He is also co-author of Financial Analysts Journal paper titled "What Happened To the Original Stocks in The S&P 500?" He is also the co-author of the Financial Analysts Journal paper 'What Happened to the Original Stocks in S&P 500?' and the Wall Street Journal article "The Great American Bond Bubble". Christopher Gannatti. Christopher Gannatti started at WisdomTree in December 2010 as a Research Analyst, working directly with Jeremy Schwartz (CFA(r), Director Research). He assists in the creation and communication of WisdomTree's views on the markets as well as analysing existing strategies and creating new approaches. Christopher joined WisdomTree after four-and-a-half years at Lord Abbett as a Regional Consultant. Rick Harper: Rick Harper is the Head of Fixed Income & Currency at WisdomTree Asset Management. He oversees currency and fixed income products that have been developed in collaboration with Western Asset Management and the BNY Mellon Corporation. Rick has more than 19 years of investment experience, including portfolio management and strategy positions at some of the most prestigious investment firms. Before joining WisdomTree, Rick was a senior strategist at RBC Dain Rauscher and Bank One Capital Markets. He also worked with ETF Advisors and Nuveen Investments. Bradley Krom: Bradley Krom joined WisdomTree in December 2010 as a member the Fixed Income and Currency group. He assists in communicating WisdomTree’s views on fixed income and currency markets as well as analysing existing and potential fund strategies. Bradley was a senior trader at TransMarket Group's proprietary trading desk before joining WisdomTree. Tripp Zimmerman, Research analyst Tripp Zimmerman joined WisdomTree in February 2013 as a Research Analyst. He assists in the creation and communication of WisdomTree's views on the markets as well as analysing existing strategies and creating new ones. Tripp was a fixed income specialist at TD Ameritrade before joining WisdomTree. Tripp has also worked in various roles related to investment at Wells Fargo Advisors and TIAA-CREF. Tripp received a double degree in Economics/Philosophy from The University of North Carolina at Chapel Hill. Tripp holds the designation of Chartered Financial Analyst. Jonathan Steinberg, CEO. Jonathan was the Chairman and CEO of Individual Investor Group, Inc. He also served as Editor-in-Chief for Individual Investor and Ticker magazines from 1998 to 2004. Jonathan worked as an analyst in Bear Stearns & Co's Mergers & Acquisitions section before he became an entrepreneur. He studied at The Wharton School, University of Pennsylvania. In 1996, he published Midas Investing. Zach Hascoe, Capital Markets Zach Hascoe joined WisdomTree in August 2010 and works closely with David Abner (Head of Capital Markets). Capital Markets is responsible for all aspects of WisdomTree ETFs, including product development, seeding and bringing new products to market, trading strategies, and the best execution strategies to serve the client base. Zach is closely involved in the trading and liquidity community. He also does analytics on ETF baskets as well as the capital markets. He contributes regularly to WisdomTree's blog on topics such as capital markets, liquidity and structure, as well best execution. He also manages hedge fund relationships at the firm. Zach holds a B.A. Comment