The Decay of Cay

We revisit the ability of different versions of the consumption-wealth ratio (cay) to predict stock market returns and show that forecasting power has declined over at least the last decade up to the point that it is neither in-sample, out-of-sample, nor economically significant. We uncover that the loss in predictability goes along with a structural shift in the underlying cointegrating relationship. Over the past decades, the development of asset wealth is increasingly detached from consumption, which makes it unlikely that a predictor derived from the representative agent's intertemporal budget constraint can capture stock market behavior