The equity risk premium computes the spread between the earnings yield and the risk-free rate offered by government bonds. Simply put, the higher the premium, the higher the expected return in the market.
As demonstrated in the graph below, the spread is at its widest margin today since the financial crisis in 2008. Opportunistic investors that capitalized on the spread 3 years ago may have caught the bottom on March 6, 2009, when the S&P 500 hit 666 intra day. As of this writing, the market has appreciated by 96.2%, all the way to 1308.
If history is a guide, as it always is, this market represents another historic buying opportunity for long-term investors.
