Amid Worries, New Equity Risk Premium Data Explained

Published Sunday, November 29, -0001 at: 7:00 PM LMT

The Federal Reserve cut interest rates this past week for the first time since the 2008 financial crisis because of fears the U.S. economy was slowing. U.S.-China trade talks ended with no progress and President Trump announced additional tariffs on Chinese imports, deepening the trade war between the world's two largest economies and the chance of a global slowdown. Meanwhile, Friday's new jobs report showed continuing strength in the U.S. economy's 10-year old expansion, though slower growth could result in a cut in profit expectations in the weeks ahead, as the stock market continued to hover near its all-time high.

Amid the worries investors face, here's a reminder about this important fundamental financial concept.

A rubric of modern portfolio theory taught at colleges and universities holds that investors get paid an extra return for taking risk. The risk premium is the amount you get paid for owning a risky asset.

To quantify the equity risk premium, here are the numbers: Over the 21½ years ended June 30th, 2019, the risk-free 90-day U.S Treasury Bill averaged an annual return of 1.94%, compared to a 7.30% annualized return on the S&P 500 stock index, according to economist Craig Israelsen, whose research we license to share with clients and friends.

This 21½-year period encompasses two full economic and bear market cycles — the tech-bubble bursting in 1999 and the global financial crisis of 2008 — so it is an instructive period to examine.

The difference between the 7.30% average annual return on the S&P 500 index and the 1.94% return on a risk-free T-Bill is 5.36%. The 5.36% — the extra return annually averaged on equity invested in America's 500 largest publicly-held companies in the 21½-year period — is the equity risk premium.

In a time of heightened uncertainty, stock investors are tested to accept higher risk if they hope to earn a premium over less-risky Treasury Bills. That's an important financial fundamental to remember in times like these.

After closing at an all-time high of 3,025.86 last Friday, the Standard & Poor's 500 stock index of large public companies, closed about 2% lower to end the week at 2,932.05.


This article was written by a veteran financial journalist based on data compiled and analyzed by independent economist, Fritz Meyer. While these are sources we believe to be reliable, the information is not intended to be used as financial or tax advice without consulting a professional about your personal situation. Tax laws are subject to change. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. No one can predict the future of the stock market or any investment, and past performance is never a guarantee of your future results.

This article was written by a professional financial journalist for Advisor Products and is not intended as legal or investment advice.

2021

2020

2019

2018

2017

2016

2015

Company Info

35 Pinelawn Rd., Suite 101E
Melville, NY 11747
631.454.2000

805 Third Avenue
18th Floor
New York, New York 10022
212.371.3950

Our Disclosure

Wealth Advisory solutions provided by subsidiaries of Percheron Asset Management Group, Inc.: Herold Advisors Inc. and Lantern Wealth Advisors, LLC., SEC registered investment advisors. Securities offered through Herold & Lantern Investments Inc., a registered broker dealer, Member FINRA, MSRB, SIPC.

Bernard Herold & Co., Inc.
Rule 606(a)1 Reporting Public Disclosure

 

This website uses cookies for navigation, content delivery and other functions. By using our website you agree that we can place cookies on your device. I understand

Welcome!

Welcome to Herold & Lantern Investments, Inc., and our new web site! We invite you to take a look around.

Bernard Herold & Co., Inc., and Lantern Investments, Inc., both family-owned firms with decades of experience, have merged to become Herold & Lantern Investments, Inc.  What that means to our existing clients is simple: stabilityand opportunity.  Clients keep their account numbers, and the same talented professionals will continue to serve them. Plus, with significantly enhanced and technology driven capabilities, our already excellent level of customer service will be even better. Read more about the merger.

As you navigate the site you will see the scope and range of our services. We hope you will get to know more about the firm, and its leadership. One thing you can be assured of is that we remain committed to responsiveness. Clients can always reach their investment professionals, or either of us, directly.

If you are an investment professional interested in learning more about our firm, our plans for growth, and the opportunities we offer, let us hear from you. Your passion for financial services, and sincere desire to help your clients reach their goals, means that we should talk.

We have many people to thank for helping us reach this new milestone, but our success has, and always will, come from the trust our clients put in us – a trust we strive to earn every day.

 

With sincere appreciation,

 

Keith lanton
President

Larry Herold
Chief Operating Officer