Summary
Our stock/bond asset-allocation model, which we call the Stock-Bond Barometer, is indicating that stocks are the asset class offering the most value at the current market juncture. Our model takes into account real-time levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading, going back to 1960, is a modest premium for stocks of 0.16 sigma, with a standard deviation of 0.97. As such, stocks normally sell for a slight premium valuation. But the current valuation level now is a 0.19 sigma discount for stocks, reflecting in large part the recent sharp move lower in long-term interest rates. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 20, within the normal range of 13-24. The current S&P 500 dividend yield of 1.2% is below the historical average of 2.9%, but is also 32% of the 10-year Treasury bond yield, compared to the long-run average of 39%. Further, the gap between the S&P 500 earnings yield and the benchmark 10-year government bond yield is about 390 basis points, compared to the historical average of 400 basis poi
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