Summary
Our stock/bond asset-allocation model, which we call the Stock-Bond Barometer, is indicating that bonds are the asset class offering the most value at the current market juncture. Our model takes into account real-time levels, historical growth rates, 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 from the model, going back to 1960, is a modest premium for stocks of 0.09 sigma, with a standard deviation of 1.05. In other words, stocks normally sell for a slight premium, which they have since inflation kicked higher in 2022. The current valuation level now is a 0.5 sigma premium for stocks, reflecting in large part the move higher in long-term interest rates since last fall and the conclusion of the election. Other valuation measures also show reasonable (if not discount) multiples for stocks. The current forward P/E ratio for the S&P 500 is about 21, within the normal range of 15-24. The current dividend yield of 1.2% is below the historical average of 2.9%, but is also 26% of the 10-year Treasury bond yield, compared to the long-run average of 39%. The g
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