This article re-examines the evidence that cay, the residual from a cointegrating regression of consumption on labour income and household wealth, is a useful predictor of excess stock returns in Australian data. In recursive samples beginning in 1976:q4 and ending from 1990:q1 to 2003:q1, cay is a strong predictor of excess returns. In samples that end thereafter, cay loses its predictive power for returns. This is due to a break-down in the cointegrating relation among consumption, labour income and household wealth following recent developments in the housing and stock markets.
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