for the US labor market, the surge in risk-off sentiment took a bite out of the high-flying market for American shares.by a wide margin. In the current climate, however, that premium suggests US shares are still vulnerable to a period of “normalizing” performance comparisons.
The gap between US stocks and other asset classes, however, is closing. As recently as early July, for example, US shares were outperforming US bonds (US 10-year Treasury yield The unusually wide premium in US stocks vs. US bonds in recent years was always susceptible to normalizing, but for a variety of reasons a high premium persisted. The question is whether we’re looking at a new period of market rebalancing. No one knows for sure, but looking at history offers some perspective for managing expectations.
By some accounts, a “normal” risk premium is somewhere in the 3%-8% range, although debates rage about exact numbers. TheThe risk premium has looked excessive in recent years. Meanwhile, Mr. Market, it seems, never gets it exactly right in real-time, leaving wide swings as the only constant through time. That implies that the unsustainably high-risk premium of recent vintage may give way to its counterpart.
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