Published Friday, August 2, 2019 at: 7:00 AM EDT
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 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 advice without consulting a professional about your personal situation. Indices are unmanaged and not available for direct investment. Investments with higher return potential carry greater risk for loss. Past performance is not an indicator of your future results.
August Retail Sales Indicate The Recovery Is Intact
This Week’s Financial Economic News
Latest Financial Economic News For Investors
After Fed Inflation Policy Speech, Stocks Closed At New Record High
Stocks Closed 1% Off All-Time High; Strong New Economic Data
Stocks Broke Record High Again This Week
U.S. Jobs Picture Improved, Covid Variant Risk Declined, And Stocks Closed Week At Record
This Week’s Economic And Investment News
Positive Earnings, Housing, and LEI News; Stocks Closed Week At A Record
Today Versus Post-War History Of U.S Economic Cycles
Stocks Surged 1.1% Today, Closing At A Record High For The Third Straight Week
Strong Jobs Report Confirms Recovery
What's Ahead For The Second Half Of 2021?
Despite Strong Economic News, Stocks Dropped This Past Week
Stocks Closed At A Record High; What's Expected For The Rest of 2021?
Jobs Situation Report Pushes Stocks A Fraction From All Time High
Inflation Rate Doubled In Past Two Months
Fed Signals It's Thinking About Starting To Talk About Tightening
Expect Inflation To Make Investors Nervous Through 2021
Stocks Closed At A Record, Ignoring A Bad Jobs Report
Stocks Soared 5.2% In April; Now, For The Good News
A Window Of Opportunity Is About To Close
Retail Sales, Housing Starts, And Stocks Rocket Higher
The Fed Is Not Braking The Boom Anytime Soon
As your financial partner, our mission is to provide you the information you need to make the choices that matter most in your life.
August Retail Sales Indicate The Recovery Is Intact
Retail sales for the 12 months through August rose 14.9%. According to the U.S. Census Bureau, retail sales totaled $618.7 billion in August, a seven-tenths of 1% jump from July.
