twohumans
Investors are not being adequately compensated for owning the S&P 500 (SP500) at current levels given the volatility in equities, according to a senior global strategist at Wells Fargo.
In a market commentary, strategist Scott Wren said that stocks are much more volatile than bonds due to the recent moves in fixed-income yields and the long-term history of interest rates.
He said that given the current yield from Treasuries and the record highs by the S&P 500 (SP500) so far this year, “it is tough to conclude anything other than investors are not being adequately compensated.”
To explain this, he studies the equity risk premium (or ERP), which states that due to the higher price volatility of stocks, earnings on the S&P 500 (SP500) should be higher than the yield of a U.S. Treasury security (US2Y), (US5Y), (US10Y), (US30Y).
The S&P 500 (SP500) has an earnings yield of 4.5% (as of March 6) — this is calculated by dividing the estimated earnings per share by the index’s current price level.
Based on the same metric, the earnings yield of the two-year Treasury note (US2Y) is 4.61%.
In addition, he said, Bloomberg data has shown that since Jan. 1, 1998, the average ERP has been 2.98% using the two-year T-note yield (US2Y). “That means the current negative ERP is more than 3% below the long-term average.”
