I did not say that stocks were cheap, particularly at this stage of the economic cycle. But they are not as overvalued as the uber-bears lead us to believe. Earnings growth dropping below 10% in the first quarter (down from double digits) and potentially dropping further and potential rise in interest rates are definitely concerns.
I would not be surprised with a 10-20% decline in stocks sometime in the next 12 months.
If one is expecting interest rates as high as the late 70’s/ early 1980’s, then I’d definitely shy from stocks.
I don’t expect that.
Now, about that risk premium. How does your current assessment of a risk premium of 1.5% compare to history ?
Below is a chart showing the S&P 500 P/E and inverse yield on the 10-year bond.
There are definitely periods (e.g. before 1964) where a risk premium appears, but it tends to be small or non-existent most of the time.
1974 – 1980 was the only period I can find where the risk premium re-appeared after 1964.
EDIT: Today 100/10-year yield is 21.4.
[img_assist|nid=3322|title=Stock Market P/E and Inverse Rates|desc=|link=node|align=left|width=466|height=315]
