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ASR in Bloomberg Opinion: Points of Return

Ella Rathgeber

12th SEP. 2023

Bloomberg’s John Authers discusses the challenges of calculating the value of the Equity Risk Premium (ERP) in his recent Opinion’s piece.

In straightforward absolute terms, without comparing to bond yields, equity valuations are again getting hard to ignore... Lerner says that equity valuations are now at levels “consistent with the post Global Financial Crisis (GFC) era of loose monetary policy conditions.”

This chart from Ian Harnett of Absolute Strategy Research offers the two most popularly cited long-term valuation metrics for US stocks – Shiller P/Es or “CAPEs”… These measures suggest that stocks are historically expensive, at valuations comparable to the eve of the Great Crash in 1929 and of the GFC in 2007.

Over periods of 10 years or more, these indicators prove to be strongly predictive… High valuations will have no effect on how the stock market performs next week or next month. But they do tell us that the market has baked in an assumption of calmly quiescent inflation, and the losses if that doesn’t come true will be painful.

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