QVMM - The Three 'Rs' Of Equities: Risk Reward And The Role In A Portfolio

2024-05-02 09:25:00 ET

Summary

• Both interest rates and Treasury yields ratcheted upward with pernicious inflation, prompting renewed discussion about equity risk premiums in a new environment with abundant opportunity for yield.
• Given the structural headwinds supporting declining rates, we question whether real yields of 2% (or more) are sustainable for long-term investment.
• As long-term investments in real assets, equities deserve comparison to real risk premiums.

By Jeremy Schwartz, CFA, Brian Manby, CFA

Markets have been fascinated by equity risk premiums recently.

Not long ago, interest rates were near 0%, Treasury yields offered less than 1%, inflation was benign, and there was little discussion about whether the earnings yield on equities offered appropriate compensation for their inherent risks. Risk premiums simply did not matter in a yield-scarce environment when the TINA (“there is no alternative”) narrative dominated markets. And TINA existed for good reason, as equities offered very attractive compensation relative to bonds of all durations....

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