Top equity strategists have pointed to elevated equity risk premiums as a great reason to buy stocks.When equity risk premiums are high, stocks are either really cheap or bonds are really expensive. Or something in between. Societe Generale’s Global Asset Allocation team led by Alain Bokobza note that equity risk premiums have just hit levels that we haven’t been seen since March 2009, when the S&P 500 hit that historic low of 666.
Should history repeat itself, this could prove to be a good entry point for equities from an extreme valuation standpoint. Over the last two decades, the US risk premium reached 6.8% on two occasions: in December 2008 and March 2009. The latter turned out to be a good entry point for equities, but four months earlier the S&P 500 index was still 17% above its bottom. Should history repeat, we would be close to an opportunity for long-term investors. Note that the last leg of the downward correction in March 2009 was followed by a V-shaped recovery, one so steep that two weeks after the bottom the S&P 500 had fully recovered.
But this time around, they note some differences that make stocks a little less attractive than they were back in 2009.
However, US equity is not outright inexpensive: the Shiller P/E ratio (cyclically adjusted valuation measure) was at 13.3x in March 2009 versus 20x currently. The extremely high risk premium is essentially reflecting the rich valuation of “safe haven” government bonds (1.5% yield now compared to 2.9% in March 2009).
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