Capital Market Expectations

The focus of this quarter’s letter is on developing estimates for market returns. This process is referred to as “developing capital market expectations” or “CME”. First, we will discuss what we hope to accomplish by setting CME, along with the limitations. Next, we will walk through developing CME by examining historical asset class returns, presenting a model that has done a good job explaining the make up of historical market returns, and finally using the model to set a range of estimated return expectations for the next ten years. This letter continues our theme of educating our clients about Empirical’s investment approach. We realize that our clients possess varying levels of interest and understanding of investment concepts and because of this, when we get to the point of creating return expectations the focus will stay on US stocks as represented by the S&P 500 and bonds as measured by the Ten Year Treasury Note.

 

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