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Thus, as you peruse my historical data on implied equity riskpremiums or PE ratios for the S&P 500 over time, you may be tempted to compute averages and use them in your investment strategies, or use my industry averages for debt ratios and pricing multiples as the target for every company in the peer group, but you should hold back.
Breaking down just US equities, by sector, we can see the damage across sectors: The technology sector lost the most in value last week, both in dollar terms, shedding almost $1.8 There was undoubtedly some panic selling on Friday, but the flight to safety, whether it be in moving into treasuries or high dividend paying stocks, was muted.
While the rise in treasury rates has been less dramatic this year, rates have continued to rise across the term structure: US Treasury While short term rates rose sharply in the first half of the year, and long term rates stabilized, the third quarter has sen a reversal, with short term rates now stabilizing and long term rates rising.
In my second data update post from the start of this year , I looked at US equities in 2022, with the S&P 500 down almost 20% during the year and the NASDAQ, overweighted in technology, feeling even more pain, down about a third, during the year.
The first is that it was an uneven recovery, if you break stocks down be sector, which I have, for both US and global stocks, in the table below: As you can see, technology was the biggest winner of the year, up almost 58% (44%) for US (global) stocks, with communication services and consumer discretionary as the next best performers.
In the first five posts, I have looked at the macro numbers that drive global markets, from interest rates to riskpremiums, but it is not my preferred habitat. The second set of inputs are prices of risk, in both the equity and debt markets, with the former measured by equity riskpremiums , and the latter by default spreads.
Discounted cash flow approaches are also utilized within other functions of an organization, such as treasury, budgeting, financial planning and analysis, and tax planning. The adjustment added to the risk-free rate to arrive at the risk-adjusted rate is often referred to as the “riskpremium.”
Interest rates : To understand the link between expected inflation and interest rates, consider the Fisher equation, where a nominal riskfree interest rate (which is what treasury bond rates) can be broken down into expected inflation and expected real interest rate components.
By focusing so much attention on a small subset of companies, you risk developing tunnel vision, especially when doing peer group comparisons. While some of the companies in this data trace their existence back decades, there is a healthy proportion of younger companies, many in emerging markets and new industries.
Carrying this through to the real world, you should not be surprised to see technology and pharmaceutical companies, the two biggest spenders on R&D, report much higher accounting returns than they are actually earning on their investments.
As I have argued in all four of my posts, so far, about 2022, it was year when we saw a return to normalcy on many fronts, as treasury rates reverted back to pre-2008 levels, and risk capital discovered that risk has a downside.
In my last post , I described the wild ride that the price of risk took in 2020, with equity riskpremiums and default spreads initially sky rocketing, as the virus led to global economic shutdowns, and then just as abruptly dropping back to pre-crisis levels over the course of the year. 06) and 10-year T.Bonds (-0.48).
In a post at the start of 2021 , I argued that while stocks entered the year at elevated levels, especially on historic metrics (such as PE ratios), they were priced to deliver reasonable returns, relative to very low risk free rates (with the treasury bond rate at 0.93% at the start of 2021).
The overriding message in all of this data is that Russia/Ukraine war has unleashed fears in the bond market, and once unleashed that fear has pushed up worries about default and default risk premia across the board.
RiskPremiums : You cannot make informed financial decisions, without having measures of the price of risk in markets, and I report my estimates for these values for both debt and equity markets. I extend my equity riskpremium approach to cover other countries, using sovereign default spreads as my starting point, at this link.
The first has been the steep rise in treasury rates in the last twelve weeks, as investors reassess expected economic growth over the rest of the year and worry about inflation. The Stocks Story As treasury rates have risen in 2021, equity markets have been surprisingly resilient, with stocks up during the first three months.
At the start of the month, as has been the case for much of the last decade, the focus was on technology, partly because of its large weight in overall equity value at the start of 2025, and partly because of the punishment meted out to tech stocks during the first quarter of the year. trillion that they lost in the first week of the month.
Thus, my estimates of equity riskpremiums, updated every month, are not designed to make big statements about markets but more to get inputs I need to value companies. That said, to value companies today, I have no choice but to bring in the economics and politics of the world that these companies inhabit.
10] , [23] , [2] Discount Rate: The rate used to discount future cash flows is typically the cost of equity, calculated via the Capital Asset Pricing Model (CAPM): Cost of Equity = Risk-Free Rate + Beta * Market RiskPremium. [23] 23] Risk-Free Rate: Tied to government bond yields (e.g.,
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