Expected Returns: An Investor's Guide to Harvesting Market Rewards

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Cyclical variation in asset returns

• Data gathered over business cycles show that, on average, excess returns on risky assets are especially high near cyclical troughs and low near cyclical peaks.

• Forward-looking value indicators (dividend yield, credit spread, curve steepness) tend to decline through expansions and rise through contractions.

• Observing how the growth environment intersects with the inflation or volatility environment gives further insights into asset class behavior. Equity returns have depended on volatility and inflation conditions more than on growth; they excel in disinflationary and stable environments. Bonds have primarily depended on inflation conditions (benefiting from disinflation), while commodities and housing returns have varied most with the growth environment (benefiting from strong growth).

This chapter reviews the way realized returns—and some ex ante carry and value indicators—vary through the business cycle or across different macroeconomic environments. Long data histories are needed for such assessments, which restricts this empirical analysis to core asset classes.

Unlike most of the book, this chapter focuses on contemporaneous empirical relations. The observed relationship between the business cycle and asset returns may be more reflective of unexpected returns (data surprises) than of expected returns. When interpreting the relationship of asset returns to the prevailing macroeconomic environment, we must also keep in mind financial ...