summary
Our equity/bond asset allocation model, known as the equity bond barometer, shows that bonds are the most value-providing asset class at the junctions of the current market. But barely. This model is expressed in terms of standard deviation to mean or sigma. The average dates back to 1960, is a modest premium for 0.09 Sigma stocks with a standard deviation of 1.05. In other words, stocks are usually sold for a small premium valuation. The current valuation level is the 0.17 Sigma Premium of the stock, which has declined in the wake of a share sale two months ago. Other valuation measures also show reasonable (if not discount) multiples of stocks. The current forward P/E ratio of the S&P 500 is about 19, the midpoint of the normal range. The current dividend yield on the S&P 500 is 1.2%, below the historic average of 2.9%, while the relative reading to 10-year financial bond yield is 28% compared to the long-term average of 39%. Furthermore, the gap between the S&P 500’s revenue yield and the benchmark 10-year government bond yields reached 365 basis points compared to the historic average of 400. We are also considering S&P ratings from the perspective of sales and book value. In price/book, it’s no surprise that stocks are priced at high ends in the historic range of 5-1.8. In terms of price/sales, the current 3.0 ratio is above the historical average of 1.9, but well below the 4.0 multiple.
