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Market Risk

 
By Long Term Standards, Credit Risk Is Currently Underpriced 
(1) Risk Premium: Spread between Aaa and Baa Bonds Since 1962

 

 Fifty-Four Year: AAA BAA Spread
Minimum Yield/Spread
3.21% 4.19% 0.31
Maximum Yield/Spread
15.85% 17.29% 3.47
Median Yield/Spread
7.23% 8.09% 0.91
Average Yield/Spread
7.35 % 8.38% 1.03
Current Yield/Spread
4.26% 3.4%    0.85
Source: Board of Governors of the Federal Reserve System
The current market is more risk tolerant than average since 1962. In other words, investors are currently being offered a substandard credit risk premium. Given our aging population, and the widespread need for investment income, this has obvious implications.
Additionally, interest rates are about half the average since 1962, indicating substantial long term interest rate risk.
Over the last fifty-five years, credit market risk premiums have been attractive, based on a 1.5 spread, six times, or roughly once every ten years, and really attractive twice.
(2) The Relationship Between GDP And Market Cap
(The So-Called Buffett Indicator)
Conclusion: The broad stock and bond markets currently entail above average risk. Over the last sixty years, the market has offered extreme bargain pricing three times, which would require a 60% decline from current pricing. A 30% decline would suggest reasonable value.
Of course these indicators of value and risk are compendiums of thousands of securities, each with its own individual characteristics and investment prospects. I use these measures as indicators of how much caution to exercise in my investment activities.