Stocks finished off last week on a high note, and they’re starting this week with a bit of a rally, too. Crude oil is also up, trading for around $81 a barrel. That’s the highest since April. Treasuries, the dollar, and gold and silver are flat.
On the news front...
The trucking giant Yellow Corp. (YELL) is filing for bankruptcy and shutting down. While it has been in business for almost 100 years, Yellow has struggled for the last decade with lost business and crushing debt. Some 30,000 workers will lose their jobs, while taxpayers will likely lose hundreds of millions of dollars because the company received a $700 million government loan during the COVID-19 pandemic.
If it seems like the Wall Street Journal has been writing a story per week saying why stocks are risky, it’s because it has. And all stocks have done is rise for the last nine months (a key reason I’ve kept advising you to “Be Bold”!) This time, it’s because the “equity-risk premium” is at a two-decade low.
That’s a jargony term for the extra compensation an investor gets for assuming the risk of investing in stocks rather than safer government bonds. You divide what the companies in the S&P 500 are projected to earn in the next year by the index level itself. Then you compare the resulting “earnings yield” to the yield on 10-year Treasuries, either nominal or inflation-protected.
The bigger the gap, the more compensation you’re getting. Right now, that premium is only 1.1 percentage points over the yield on the 10-year Treasury – the lowest since 2002. Measured against the yield on 10-year Treasury Inflation Protected Securities (TIPS), the premium is just 3.5 percentage points. That’s the lowest since 2003.
What would drive more activity in the housing market? More sellers selling their homes! The problem is, so many owners locked in cut-rate mortgages when rates were less than half of today’s levels. Plus, overall prices have skyrocketed in the last few years. That means many people simply can’t afford to move, a dilemma that keeps inventory from rising. You can read more on the situation in this solid Bloomberg story.