It was not a good day for stocks, as all three major U.S. indices ended lower Tuesday, after having been higher in the late afternoon.
Although some talking heads have been growing cautious on stocks, they have surged to start 2019 higher and there's still a technical argument for further gains.
Could the S&P 500 Push Even Higher?
"Stocks may keep going higher," wrote LPL Financial's Chief Investment Officer John Lynch, adding that "stock valuations, when compared with bond yields, are actually historically cheap."
Lynch noted that the current equity risk premium (ERP) on the S&P 500 is 3% against the 10-year treasury yield, which is currently at 2.63%. That risk premium of 3% is far above the average ERP of 0.5% for the past six decades, Lynch noted. Before we get into what this means for stock gains, let's go over this:
What is the Equity Risk Premium? The ERP is the difference between the expected average earnings yield on a stock for the next 12 months, usually for the S&P 500 for the U.S. market, and the yield on the 10-year treasury bond. It's a measure of how much excess return an investor is getting for taking the risk of owning a stock instead of a safe treasury bond.
Case in point:
Lynch wrote that, since 1960, when ever the ERP for the S&P 500 is above 3%, the index sees gains of 12.4% for the next 12 months on average.
Federal Reserve Chairman Jerome Powell said U.S. regulators will conduct a "thorough" review of BB&T's (BBT) - Get BB&T Corporation Report proposed acquisition of banking rival SunTrust (STI) - Get SunTrust Banks, Inc. Report after Democratic Sen. Elizabeth Warren called the process a "rubber stamp," wrote TheStreet's Bradley Keoun.
Aurora Cannabis Buys in Portugal
Aurora Cannabis (ACB) - Get Aurora Cannabis Inc. Report announced the acquisition of a 51% ownership stake in Portugal's Gaia Pharm Tuesday as the company looks to establish a local facility to produce medical cannabis and related products as it widens its presence in Europe, wrote TheStreet's Tony Owusu.