Data Update 2 for 2021: The Price of Risk

This article analyzes how to measure the price of risk in financial markets through default spreads in bond markets and implied equity risk premiums in stock markets. The author argues that risk premiums—the extra return investors demand for bearing risk—are dynamic, observable metrics that better reflect market valuation than static measures like the P/E ratio. Using his framework, the author concludes the S&P 500 is overvalued by approximately 12% as of January 1, 2021, with significant downside risk unless economic growth and interest rates follow a Goldilocks scenario.