Tepper's Chart

Hedge fund manager David Tepper was on CNBC this morning.  He gave a very bullish longer term presentation on equities.  Part of his argument was the chart I'm showing above which purports to show that the Equity Risk Premium {EQP}, the gap between expected return on stocks vs. bonds is as cheap as it has been at other crisis points such as the 1972-74 bear market and in 2009 when everybody thought the world was going to come to an end.   There is no direct way to measure market expectations going forward so the folks over at Liberty Street Economics analyzed twenty-nine of the most popular and widely used models to compute EQP over the last 50 years.  Using a wide variety of tools permitted them to only look at data that would have been available at comparable times in the past.  For example to compute the equity risk premium for January 1970, they only used data available to them in December, 1969.

Of course one of the reasons EQP is so high right now is that interest rates are still at historic lows.  EQP could change dramatically if interest rates were to rise suddenly.  Another thing that could throw this analysis under the bus would be if we were to experience a sudden decline in profits in corporations.  Neither of these events looks to be in the offing over the next 6-12 months.  Corporate profits are at record highs and the Federal Reserve is unlikely to end their stimulus this year.  

Does this mean that stocks are going to rip higher in the months ahead.  Nobody knows.  What this does tell you though is that EQP probably provides some floor for stocks when the next correction hits Probability would therefore suggest that corrections for the foreseeable future are better to buy events.

Source Libertystreeteconomics.newyorkfed.org: Are Stocks Cheap? via Businessinsider.com