Equity Risk Premiums Still too High

If the equity risk-premium (versus Treasuries) were to return to its historic average of 4.5%, the S&P would be 50% higher than it is today. Now, I don’t know when or if that will happen, but my numbers are based on real facts: the historic spread between corporate bonds and Governments, the least-squares regression of historic S&P earnings, today’s yield curve, etc. All of the inputs are FACTS, with NO subjective data whatsoever and no voodoo numbers regarding where the market might be next week (if the market is so undervalued, who cares where the market MIGHT BE next week?)

The equity-risk premium is still over 10% like it was when we loaded up on stocks a year ago when everyone else was running scared. I’m not even worried about a possible trend toward socialism, because the market may, already, be telling us about likely changes in Congress next November. Forget the technicians’ point about the market going up on lower volume. Volume has nothing to do with stock prices, since stock prices are NOT set by supply and demand (except in the short-term); they are a function of intrinsic value, unlike wheat, gold, oil, etc. After all, again looking at FACTS, a lot of money came OUT of the U.S. stock market over the past 12 months based on mutual fund redemptions), but the market still went to the moon.

I don’t know how much longer this bull market will last, but it seems to me that an equity-risk premium of more than twice the historic norm will not last forever. People are afraid of the new Congress (fear and greed are the only things that affect the equity-risk premium), but that won’t last forever because the same people have the capability to change (reverse) things at the ballot box. I only mention change in politics because that’s in the future; I do not mention economics because those numbers are in the past, and the stock market is a LEADING, not lagging, economic indicator.

The opinions expressed are the author’s.