Discuss, based on the chief economist’s prediction, the implications for the following:

i. Bond yields ii. Equity returns iii. Short-term interest rates Discuss, based on the chief economist’s prediction, the implications for the following:

Cambo compares her business cycle forecasting approach to the approach used by the chief economist. Cambo bases her equity market forecast on a time-series model using a composite index of leading indicators as the key input, whereas the chief economist uses a detailed econometric model to generate his economic forecasts.

Jan Cambo is chief market strategist at a US asset management firm.
While preparing a report for the upcoming investment committee meeting, Cambo updates her long-term forecast for US equity returns.
As an input into her forecasting model, she uses the following longterm annualized forecasts from the firm’s chief economist:

Based on these forecasts, Cambo predicts a long-term 9.0% annual equity return in the US market. Her forecast assumes no change in the share of profits in the economy, and she expects some contribution to equity returns from a change in the price-to-earnings ratio (P/E).

Transcribed Image Text:

Bond yields Equity returns Short-term interest rates