Summary
Our Stock/Bond Barometer asset-allocation model is indicating that the two major portfolio asset classes are near parity on valuation. The model, our most comprehensive, goes back to 1960 and takes into account real-time price levels, historical growth rates, and forward-looking 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 0.09 sigma, with a standard deviation of 1.05. So stocks normally sell for a slight premium valuation compared to bonds. The current valuation is a 0.38 sigma premium for stocks — not a discount but easily within the normal range. Other measures also show reasonable multiples for stocks. The forward P/E ratio for the S&P 500 is about 23, within the normal range of 15-24. On price/book, stocks are priced at the high end of the historical range of 1.8-5.5, given that tech stocks, with low capital bases, are the biggest component of the market. The theory holds on dividend yield as well. The current S&P 500 yield of 1.09% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 27%, compared to the long-run average of 39%. On price/sales, the current ratio of 3.2 is above the historical average of 1
