The S&P 500 closed February close to an all-time high, which got us thinking about where stocks might be by the time the next Leap Day arrives on February 29, 2028. The Valuations chapter in our M2SD curriculum provides a variety of measures that investors can use to value the equity market, and a version of one of these – the equity risk premium – is our Chart of the Week. The equity risk premium is an estimate of the extra return investors should expect in exchange for incurring the higher volatility of owning stocks over bonds. The first thing investors need to know about valuation is that it tells us very little about the next week, the next month, or even the next year. But its predictive power starts to become significant past the 3-year mark and strengthens over the course of a decade. Right now, a simple relative valuation metric shows that U.S. Treasuries – represented here by TIPS since the S&P 500 earnings yield is already net of inflation – are as attractive against stocks as they have been since the early 2000s as the Tech Bubble was bursting. Not even in the leadup to the GFC were stocks providing as little compensation for risk as they are today. Something to ponder as we are seeing slower consumer spending growth and rising numbers of individuals collecting unemployment insurance. The business cycle is the key to short-term equity market performance, but valuation can inform investors’ positioning over longer periods and, at times, exacerbate a bear market.

The Macro Week In Review

What We Read This Weekend

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