US stock risk premium indicators surge as markets fear US may face 1970s-style stagflation
Gelonghui, April 7th — An indicator shows that investors are demanding the highest equity risk premium over bonds in more than two years, as the Iran war triggers a surge in oil prices and the market worries that the US economy could fall into a stagflationary environment similar to the 1970s. This indicator is a variant of the equity risk premium, used to measure the additional compensation investors expect for holding stocks instead of risk-free US Treasuries. New York University finance professor Aswath Damodaran, known for his expertise in valuation research, calculated that this indicator neared 4.8% in early April, its highest level since late 2023. As the Middle East conflict rapidly escalates, investors’ risk appetite has diminished, with the S&P 500 Index falling as much as 9% from its highs, oil prices surging, and concerns about a resurgence in inflation growing, leading the market to focus more intensely on this indicator. For some, this environment is beginning to eerily resemble the 1970s, when the US experienced an energy crisis, stagnant economic growth, soaring consumer prices, and lackluster stock market returns. Dennis DeBusschere, President and Chief Market Strategist at 22V Research LLC, said the current equity risk premium “aligns with the stagflationary environment of the 1970s.” His firm uses this indicator from Damodaran. He warned that if the indicator rises further to reach the median levels hit during the 2008 financial crisis and the 1970s—less than one percentage point above the current level—then the S&P 500 Index could fall another 5% to 10%.
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