Bush's war on terror and the new geopolitical risk premium.

• Author: Zoakos, C.
• Position: OFF THE NEWS - George W. Bush - Brief article

The U.S. equities market has been selling at about a 30 percent discount on average since the third quarter of 2002. This represents the geopolitical risk premium that investors demand in order to own U.S. equities. During that quarter, corporate profits increased by 25.3 percent on an annual basis, but the S&P 500 index declined by 21.6 percent. Between that time and now. profit growth continued at a torrential pace. averaging 16.8 percent. That's more than double the growth rate of the entire post-World War II era. Equity prices, however, never came close to reflecting these tremendous gains in earnings because, since September 2002. investors require much higher earnings yields (relative to the benchmark ten-year Treasury yield) than before.

The figure below compares the S&P 500 earnings yield with the ten-year...