Elevated equity risk premium suggests superior equity market returns lie ahead.

The implied “equity risk premium”, i.e. the amount of return equity investors are demanding for investing in stocks over bonds, is at the 96th percentile of experience going back over 50 years – that’s high!  The data reveals that when the ERP has been above 5%, the S&P 500 has gained an average of 13.8% in the following 12 months.  That performance is almost double the average annual performance since 1960.  Furthermore, the S&P 500 is up 80% of the time when the ERP is above 5% and has been up 100% of the time in 7 instances when it has been above 5.30%.  You can see that we are now at a place when investors are assigning an abnormally high risk premium in equities.  This condition did not persist in the past and will not likely last long going forward.  Jeb Terry, Sr. Dec. 8, 2012.

Aberdeen Investment Management – a guide service for micro-cap technology investment

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