Capital Market Expecation

Question 1

Calculate Long run E(return of equity) vs E(return of equity) over a period of time

Answer 1

Long run E(return of equity) = dividend yield + long run trend of real GDP growth + inflation expectation

E(return of equity) over a period of time = Value of GDP* PE multiple* share of corporate earning / current value of GDP

Question 2

initial recovery

Answer 2

This period is usually a short phase of a few months beginning at the trough of the cycle in which the economy picks up, business confidence rises, stimulative policies are still in place, the output gap is large, and inflation is typically decelerating.
Recovery is often supported by an upturn in spending on housing and consumer durables.

                    Capital market effects: Short-term rates and government bond yields are low. Bond yields may continue to decline in anticipation of further disinflation but are likely to be bottoming. Stock markets may rise briskly as fears of a longer recession (or even a depression) dissipate.
                       Cyclical assets—and riskier assets, such as small stocks, higher-yield corporate bonds, and emerging market equities and bonds—attract investors and typically perform well.