Finding Opportunity: The Equity Risk Premium

Samuel Johnson once said, “The use of traveling is to regulate imagination by reality, and instead of thinking how things may be, to see them as they are.” Although penned by an 18th century English writer, the idea holds true in today’s highly connected world of search bars, tweets and breaking news. Our portfolio managers’ research trips to foreign countries authenticates the data from a Bloomberg terminal or an earnings report. Treks add tacit knowledge to our wealth of explicit facts.

Last week, I was in Peru and Colombia with former president Bill Clinton and Frank Giustra in conjunction with the Clinton Giustra Enterprise Partnership. I’ve been involved with this impressive organization since its inception. I love how it brings together private companies, government and communities in developing regions of the world to eradicate poverty by growing jobs and training local workers.

As part of the trip, Clinton signed an agreement between the foundation and Peru’s Ministry of Foreign Trade and Tourism to promote and reward hotels and restaurants that buy from local producers.

Each group will give $450,000 over the next three years to train local producers to become suppliers for Cusco’s hospitality and restaurant sector. All told, suppliers should bring in more than $5 million in income over the next five years and benefit more than 1,800 people, according to the Clinton Foundation.

In Cartagena, Colombia, Clinton and Giustra celebrated the opening of a warehouse that will provide a local supply chain for the area’s hospitality, restaurant, catering, and supermarket sectors, as well as the Acceso Training Center, which will train about 20,000 local residents over the next 10 years to work in the hospitality sector.

Moving beyond Latin America, other U.S. Global portfolio managers are finding exciting opportunities on their travels. When Michael Ding recently traveled to Thailand, he immediately

During these 50 years, the premium nearly fell to zero two times. One time was in 1987, when investors’ exuberance toward the equity market caused stocks to rise quite sharply.
The most recent dip in the equity risk premium was at the height of the great tech boom in 2000. Many investors remember triple-digit price-to-earnings multiples. And some companies saw terrific price appreciation even though there were no reported earnings to be had at all. You’ll remember Fed Chairman Alan Greenspan coining the phrase, “Irrational Exuberance.”

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Looking at the chart above, we see an opposite picture. In fact, today’s equity premium is at 5.4 percent, as high as it was in November 1974 and January 2009.

And what happened in these two time frames? Well, we saw the dramatic increase in equity prices from 2009 to today.

Back in the 1970s, investors experienced the collapse of the Bretton Woods system and “a terrible case of stagflation,” says the Fed of New York. However, that didn’t stop the stock market, as gains were incredible, increasing nearly 15 percent on an annualized basis from 1974 to 1979.

The chart illustrates a tremendous case for U.S. stocks over the next five years. Make sure your portfolio is poised to participate.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies.

Written By: Frank Holmes