The S&P 500 risk premium, which measures the extra earnings stocks offer over safer 10-year Treasury bonds, has turned negative for the first time in over two decades. This means that investors are no longer being compensated in earnings for taking on the additional risk of equities relative to bonds-a signal that valuations in the stock market have become stretched.
This reminds us of the similarity to 2002, when the market came out of the tech bubble and lofty valuations resulted in years of uneven performance.
While this doesn’t predict an immediate downturn, it suggests a cautious approach may be warranted. Maintaining diversification across various asset classes and focusing on managing risk, while seeking opportunities in undervalued areas, is crucial for navigating frothy markets like this one.
Market’s Premium Problem
- We believe the preservation of capital is key to consistent, long-term investment success.
- Our investment approach is grounded in economic theory and backed by quantitative analysis.
- Managing drawdown risk is a pillar from which we build our portfolios.
60-Second Breakdown: November 25, 2024
Redwood Senior Analyst Michael C. Sasaki, CFA® discusses recent market performance and explains this week’s chart.
