• The accepted thinking is that the additional risk inherent in stocks is reflected by a “Risk Premium”, being the difference of S&P expected earnings yield and the 10-year note yield.
• An alternative measure of risk is the Cyclically Adjusted Risk Premium (CARP), defined as the inverse of the Shiller CAPE Ratio (CAPE) in percent minus the 10-year note yield.
• The value of the CARP and directional trend of the CAPE can be used to profitably time investments in risk-off and risk-on assets and avoid major stock market losses.
• Prior to the Financial Crisis of 2007-2008 the CARP indicated a “risk-off” asset allocation, in contrast to the S&P Risk Premium which signaled that stocks were undervalued.
• More recently, at end of February 2021, the CARP has signaled the end of embracing risk-on assets and a switch to risk-off assets.

The S&P Risk Premium and below statement comes from Portfolio 123:
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