Announcer:
4 Your Money is brought to you by NelsonCorp Wealth Management.
Brandy Auterson-Hurst:
It’s now time for 4 Your Money. We’re joined by John Nelson, financial planner at NelsonCorp Wealth Management. Welcome back, John.
John Nelson:
Thank you for having me, Brandy.
Brandy Auterson-Hurst:
So stocks have had a tremendous run lately. Are there any indicators you’re keeping an eye on that make you a bit cautious?
John Nelson:
Yeah, they certainly have. And one metric that we follow closely is called the equity risk premium. And what that’s essentially measuring is that when investors invest in stocks, they are taking on more risk, and for that risk they’re expecting to be rewarded versus say parking their money in a treasury bond. And that’s the graphic I have with me today, Brandy, that illustrates this back to 2000. It shows how the premium has changed over the years.
After the dotcom bubble in 2000, 2001, and especially during the 2008 financial crisis, that premium was very, very high. But you can see it’s essentially just shrunk ever since then and we’re down now to 0.21%, near the lowest level that we’ve seen in over 25 years. So that’s essentially saying that stocks are barely offering more return than a safe 10-year treasury bond. A big part of that is because stocks have performed so well for so long and the yield on stocks has just been compressed an awful lot, Brandy.
Brandy Auterson-Hurst:
Okay. So does this mean investors should be moving money out of stocks?
John Nelson:
Not necessarily. So it’s not reflecting anything related to the earnings picture and how things look from that perspective. We still feel that a lot of the easy money has been made. Certainly the planning and stock selection, equity sector selection is now more important than ever though.
Brandy Auterson-Hurst:
All right, John, as always, thanks for joining us. If you missed any of our discussion, we’ll make it available for you on ourquadcities.com.
Past performance is no guarantee of future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
Indices mentioned are unmanaged and cannot be invested into directly.
This video includes a paid appearance.