An Equity Premium Quandry

Here’s something I’ve been thinking about and I’m honestly not sure if it leads anywhere.

Below is a chart I made at the St. Louis Fed’s FRED site. The blue line shows the Wilshire 5000 total return index dividend by the AA Corporate Bond total return index. In other words, it’s how much better stocks are doing than the long-term bond market.

The red line is short-term interest rates. For this, I chose the 1-month AA non-financial rate. Note that this is a rate, not an index.

Perhaps this relationship is illusionary but I’m curious if the relationship between long-term rates and equities is itself dependent on short-term rates.

I also think it’s interesting that financially speaking, the 2000-2001 recession last for a much longer time than the gray bar suggests. The later recession, however, lasted roughly as long. In both cases, the market saw the recession before it officially started.

Posted by on December 13th, 2011 at 12:47 pm


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