Why the Fed Model’s track record is dismal and lacks theoretical justification

  • The Fed Model is a market-timing tool based on the difference between the stock market’s earnings yield and the 10-year Treasury yield
  • The Fed Model is currently bearish, indicating that stocks may not be attractive
  • The Fed Model’s track record is dismal and lacks theoretical justification
  • The earnings yield alone has been more effective in predicting the stock market’s subsequent return than the Fed Model
  • The Fed Model compares a real number (earnings yield) to a nominal number (10-year Treasury yield), which is a flawed comparison
  • A more theoretically sound version of the Fed Model would compare the earnings yield to real yields and use the Cyclically Adjusted P/E ratio
  • The more theoretically sound version of the Fed Model is currently positive but lower than its historical average

The Fed Model, a market-timing tool based on the difference between the stock market’s earnings yield and the 10-year Treasury yield, is currently bearish, indicating that stocks may not be attractive. However, the Fed Model’s track record is dismal and lacks any theoretical justification. In fact, the earnings yield alone has been more effective in predicting the stock market’s subsequent return than the Fed Model. The reason for this is that the Fed Model compares a real number (earnings yield) to a nominal number (10-year Treasury yield), which is a flawed comparison. A more theoretically sound version of the Fed Model would compare the earnings yield to real yields and use the Cyclically Adjusted P/E ratio. This more theoretically sound version of the Fed Model is currently positive but lower than its historical average.

Factuality Level: 8
Factuality Justification: The article provides a detailed explanation of the Fed Model, its history, and its shortcomings. It includes data and statistics to support the argument against the Fed Model’s effectiveness. The information presented is relevant and factual, without significant bias or misleading information.
Noise Level: 3
Noise Justification: The article provides a detailed analysis of the Fed Model, its history, track record, and theoretical justifications. It compares the Fed Model with alternative approaches and offers insights from experts in the field. The article stays on topic and supports its claims with data and examples. However, the article contains some repetitive information and could benefit from more concise explanations.
Financial Relevance: Yes
Financial Markets Impacted: The article discusses the Fed Model, a market-timing tool that compares the stock market’s earnings yield to the 10-year Treasury yield. It provides analysis on the current state of the Fed Model and its implications for investors.
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Rating Justification: The article focuses on financial topics and provides insights into the Fed Model, which can impact investment decisions. However, there is no mention of any extreme events.
Private Companies: AQR Capital Management
Key People: Cliff Asness (Co-founder and Chief Investment Officer at AQR Capital Management), Antti Ilmanen (Principal and Global Co-head of the Portfolio Solutions Group at AQR Capital Management), Mark Hulbert (Regular contributor to Barron’s)

Reported publicly: www.marketwatch.com