Risk premia, once more
Lots of posts on risk premia. Fund managers are paranoid at the best of times, and there’s nothing like seeing other people make money in trades you don’t have on, to spur the thought process.
Now, for regular readers, this post is quite a bit like the recent ones, but does mention 2018’s “Red October”, so, there’s that for freshness.
ERPs
There are a lot of different ways to calculate the ERP. And the absolute numbers are still pretty good, on average, a few 5’s, a few 4’s. But some are less attractive, and all are declining. For the US, the valuation argument is very weak. 2018’s “Red October” was at…
…slightly higher levels than this. And, Red October was “sparked” by that higher than expected wages print (might have hit an annualised rate of 4%, and everyone lost their mind fearing it meant tighter monetary policy). Recall that the market tanked by ~20% in the ensuing weeks.
I agree the bears have lost the recession argument in the US, but they might not have lost the valuation argument. In the EU, I think they are winning the recession argument, but not the valuation arguement.
Coming back to Red October, it is kind of amazing that ERP’s were more favourable, and wages growth lower, than now, with little actual inflation pressure vs now where you have both.
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