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NO BUBBLE
Stocks still best
The stock market boom of the 1990s was no bubble built by wild speculation, but propelled largely from economic productivity factors, including corporate earnings, say Roger G. Ibbotson and Peng Chen.
Going forward, they say, pension fund executives and other investors should continue to look to equities as the favored place to invest, at least over bonds.
The expected equity risk premium - the return advantage of equities over risk-free long-term bonds - is alive and well and is expected to deliver close to its historical returns, according to the two researchers. Mr. Ibbotson is professor in the practice of finance at Yale University's School of Management in New Haven, Conn., and chairman of Ibbotson Associates Inc., Chicago; Mr. Chen is vice president-- research at Ibbotson.
Contrarian view
Their view is contrary to recent predictions of other analysts, who contend the expected equity risk premium will be zero or negative at least over the next few years.
A key element in the Ibbotson and Chen study is the integration of economic and fundamental factors to support the conclusion of their research.
"What happens in the stock market is probably going to be related to what happens in the economy," Mr. Ibbotson said in an interview. "Some think the stock market marches to a different drummer," he added. But it hasn't overall, and he and Mr. Chen don't expect it to in the future.
"Investors should not expect a much higher or much lower return than that produced by the companies in the real economy," they wrote in a draft of a paper they are near completing. "This model estimates the stock market return expectation (is) justified by the macroeconomic productivity."
The findings have important implications for asset allocation decisions of pension sponsors and other investors, especially "what proportion to invest in stocks vs. bonds," said Mr. Ibbotson. "What are the payoffs for risk?"
Messrs. Ibbotson and Chen say in their paper, "Contrary to several recent studies that declare the forward-looking equity risk premium is close to zero or negative,...