After being written off as irrelevant for much of the past decade, the equity risk premium, a gauge of the potential reward investors might reap from buying stocks, has fallen to its lowest level since 2007.
To some, this means U.S. stocks are no longer worth the risk now that investors can reap returns of 5% or more by buying short-dated Treasurys and other high-grade bonds. Now the situation has reversed. As inflation and expectations of a more difficult economic environment weigh on expectations for corporate profits, the nearly guaranteed returns offered by Treasurys has soared. This means the equity risk premium is once again finding use as a gauge of relative value for stocks, since it can offer helpful insights about what investors stand to gain over the short term by taking the additional risk that comes with buying stocks, or investing in stock funds.
“That’s not that much,” said Liz Young, head of investment strategy at SoFi, who spoke with MarketWatch after sharing a chart of the ERP on Twitter. Although the U.S. economy isn’t in a recession as U.S. GDP growth remains robust, the S&P 500 did enter bear-market territory last year. The large-cap index is still down roughly 17% from 4,796.56, its record high, reached Jan. 3, 2022, according to FactSet.
Be bold when others are fearful - Warren Buffet
This means you should invest in stocks. Classic misdirection.
Invest in ducks.
This title just made me bullish on stocks