Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
Upside of Inequality Oxford Unintended Consequences

AI Summary. Research defining an industry "run-up" as a cumulative return of 100% or more over two years finds that such run-ups do not predict unusually low average future returns, though they do raise the probability of a crash, defined as a 40% drawdown. Volatility, turnover, and equity issuance help predict those crashes.

Michael Mauboussin and Dan Callahan Morgan Stanley
Date Posted:
Is Database:
Database

Evidence from 147 large US and international “runups” in an industry’s portfolio indicates that average post-runup returns are similar to the market average. The higher likelihood of a crash is offset by higher returns absent a crash.

Do large industry price run-ups predict lower future returns or crashes?

Core argument: Greenwood, Shleifer, and You identified 40 U.S. industry run-ups from 1926 to 2014 and 107 international sector run-ups from 1985 to 2014, defining a run-up as a cumulative return of 100% or more, absolute and relative to the market, over two years.

Greenwood, Shleifer, and You defined a run-up as a cumulative return of 100% or more, both absolute and relative to the market, over the prior two years for a value-weighted portfolio of stocks within an industry. Further, they specified that the industry’s absolute return had to be up 50% or more over the previous five years. The run-up started the first month that the conditions were met. They identified 40 such run-ups in the U.S. from 1926 to 2014 and 107 in international sectors from 1985 to 2014. Their headline finding was that Fama is right in the sense that a run-up does not predict unusually low future returns, on average. Exhibit 13 shows the results for run-ups of U.S. industries. On the left are the 24 months prior to the first month in which the industry’s return crosses their threshold of a run-up, and on the right is the price performance for the following 48 months. Just over half of the run-ups had a crash, defined as a 40% drawdown from any price in the two years following the first run-up. The average return of all episodes after run-ups was not dissimilar to the market overall, though run-ups increased the probability of a crash, and signals along the way, including volatility, turnover, and equity issuance, helped predict it. A separate paper found that crashes often followed sharp increases in invested capital, a measure of investment intensity.

Takeaways by Macro Roundup® AI

  1. Greenwood, Shleifer, and You identified 40 U.S. industry run-ups from 1926 to 2014 and 107 international sector run-ups from 1985 to 2014, defining a run-up as a cumulative return of 100% or more, absolute and relative to the market, over two years.
  2. Just over half of the run-ups were followed by a crash, defined as a 40% drawdown from any price in the two years after the run-up began, though average returns after run-ups were not dissimilar to the market overall.
  3. Volatility, turnover, and equity issuance helped predict crashes following run-ups, and a separate paper found that crashes often followed sharp increases in invested capital, a measure of investment intensity.

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