Chart Of The Day - Expected ERP

Thinking about a "prospective" Equity Risk Premium...

What to Expect when expecting an ERP: The ERP, or Equity Risk Premium, is the premium over and above the risk-free-rate that equity investors require to take on equity risk. The higher the expected ERP, the more attractive it is to own equities, and the lower it is (and especially if it is negative) the more attractive it is to own bonds instead of equities.

• As of the July 2023 run of my Capital Market Assumptions dataset at Topdown Charts the prospective or forward-looking ERP was -4% (negative).

• This version of the equity risk premium simply takes the longer-term expected return for US equities, and subtracts the same for US treasuries.

• While this is more for longer-term investors, it does at times yield interesting tactical insights e.g. the spike to very attractive levels in March 2020 (and the smaller spike but large movement from almost -10% in 2021, to +2% in Sep 2022). At present it is certainly not attractive, albeit not as bad as it got in 2021.

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