Premiums investors will pay has dropped to very low levels. A low may be near, but perhaps this premium can fall under the 2015 low, which was then a momentum low for stocks. KK
Equity premium collapses
The premium that investors are willing to pay for stocks’ earnings has collapsed relative to the yield available on bonds. The one-year z-score of the Equity Risk Premium is now 4 standard deviations below average, a rarely-achieved extreme since 1972 with positive implications.
When the ERP was +2 or higher, the S&P’s annualized return was -4.0%, versus 6.8% when it wasn’t extreme at all. And when it was below -2, the annualized return shot up to 40.1%.
Quite a day
Wednesday’s drop triggered a number of notable moves.
* The Dow Transportation Average fell into a bear market, which has not been the negative signal it’s suggested to be.
* Nearly 60% of Financials fell to a 52-week low, 5th-most out of all days since 1990.
* A big intraday gain turned into a big closing loss for the first time since 2009.
* And stocks fell by one of the largest amounts in more than 20 years on a day the FOMC announced their rate policy.