The premium for owning stocks keeps shrinking
Key points
- The Equity Risk Premium crossed above -0.85 on Friday, then fell back below on Monday
- The whipsaw alone points to a short-term bounce but the record degrades to a coin flip by six months
- Combined with a Stock/Bond Ratio above 1.9, SPX was higher a year later 76% of the time
A whipsaw at the edge
The Equity Risk Premium hit -1.19 two weeks ago, the lowest reading in more than twenty years. Stocks were yielding less than bonds by the widest margin in two decades - a level from which the spread has almost always snapped back, and quickly. The ERP began to recover, and on Friday it crossed back above -0.85.
Then Monday happened. It crossed back below. A roundtrip in five trading days. Cross above, cross below, all at the edge of a multi-decade extreme.
This alone would be worth noting. But the Stock/Bond Ratio closed at 1.93 on Monday, near the 2 threshold that marks the upper end of its typical range. We are looking at stocks being expensive relative to bonds on two different measures, measured two different ways, at the same time.
The easy bias toward stoc