Summary
We have different ways of looking at market valuations and most are signaling that stocks are reasonably valued. Our asset-allocation model, the Stock Bond Barometer, is indicating that the two major portfolio asset classes are near parity on valuation. The model takes into account real-time price levels, historical growth rates and forward-looking forecasts of short- 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. The current valuation is a 0.37 sigma premium for stocks — not a discount but easily within the normal range. Other measures show reasonable multiples for stocks. The forward P/E ratio for the S&P 500 is about 21, within the normal range of 15-24. On price/book, stocks are priced at the high end of the historical range of 5.3-1.8, given that IT stocks, which have low capital bases, are the biggest component of the market. On price/sales, the current ratio of 3.1 is above the historical average of 1.8, but below the 4.0 multiple at the peak of the dot-com bubble. The current S&P 500 dividend yie
