Market's Premium Problem

Matthew Allgood |

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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

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Source: Bloomberg, Redwood. Data as of 11/22/2024. Date Range from 12/31/1999 – 11/20/2024.

Regards,

Allgood Financial

 

Disclosure: This piece is for informational purposes only and contains opinions of Redwood that should not be construed as facts. Information provided herein from third parties is obtained from sources believed to be reliable, but no representation or warranty is made as to its accuracy or completeness. Charts and graphs are for illustrative purposes only. Discussion of any specific strategy is not intended as a guarantee of profit or loss. Past performance is not a guarantee of future results. The objectives mentioned are not guaranteed to be achieved. Investors cannot invest directly in any of the indices mentioned above. Diversification of asset class is not a guarantee against loss.

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