Is the US Equity Premium Dying?

A recent Financial Times article discusses the possibility that U.S. equity premium could  be impacted due to the government’s handling of the coronavirus.

“It’s easy for investors to ignore problematic governments when times are good,” the article reports, adding, “The coronavirus has ended this. Equity markets, after a benign decade, are screaming for a co-ordinated, competent and concentrated response from the US government to stem what Wall Street analysts are beginning to pencil in as the fastest economic collapse in recorded history.”

The article notes that as governments in Europe and Asia have responded with “vast spending plans to cushion the blow of a twin demand and supply shock,” America’s “sluggish response, first in rhetoric and now in action” has underscored the importance of considering government competency as a factor in investing decisions. The current situation, the article says,  may also signal a “sea-change” in how investors think about pricing risk.

“The death of the American century might have been exaggerated,” the article concludes, “but perhaps this crisis will signal the end of the American valuation premium. After all, what use is accommodative business policy on the way up if it directly feeds back into the fact it can’t cushion you on the way down?”