Equity Wealth Cycles

Abstract

I document that in several countries the ratio of equity wealth to other (non-equity) wealth (EO-ratio) has moved in low-frequency cycles between 1873 to 2020. First, I find that a high level of EO-ratio strongly and robustly predicts low future stock market returns and vice versa, and using two novel present value decompositions I show that both differences in valuation- and payouts contribute to these cycles---but differently in the U.S. versus abroad. Second, I build a quantitative macro-finance model with limited participation, redistributive income shocks, and inflation and show that the model and these factors help explain these cycles.

Keywords: return predictability, aggregate wealth, long-run data, capital share, inflation

JEL Classification: G01, G11, G22