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Passive Investors should be VERY Worried

What’s your best estimate of Equity Risk Premium (ERP) for the SP500 over the next decades? 10%? 5%?


In this must-read paper, Hussman Strategic Advisors expect stocks to sharply underperform bonds in the coming years with an ERP of -5.8% !


The dashed blue line shows the level of the S&P 500 that we would associate with a historically run-of-the-mill 5% “risk premium” over-and-and above Treasury bond yields. That line stands at about 1850 here. Finally, the dotted orange line shows the level of the S&P 500 that we would associate with zero return over and above Treasury bond yields. That line stands at about 2850 here, correctly suggesting that we expect the S&P 500 to sharply lag the return on Treasury bonds over the coming years. Of course, that’s happened before. The yellow bubbles show previous instances when S&P 500 valuations implied total returns below Treasury bond returns. I’ve included several brackets, showing that from 1929-1950, 1968-1987, and 1998-2020, that’s exactly what happened. I don’t expect the current instance to be different.


The chart below shows our best estimate of the “equity risk premium” for the S&P 500, in data since 1928. The current estimate is -5.8% annually over the coming decade. We expect stocks to sharply underperform bonds in the coming years. This estimate is far more reliable across history than the Shiller-Black-Jirav model as well as Wall Street’s standard estimate, which is based on the forward earnings yield minus the 10-year bond yield. “


Read the paper.

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