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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, 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 valuation, which they have since inflation started kicking higher in 2022. The current valuation level now is a 0.45 sigma premium for stocks, reflecting in large part the move higher in long-term interest rates since the start of autumn and the conclusion of the election. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 21, within the normal range of 15-24. The current S&P 500 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%. Further, the gap between the S&P 500 earnings yield and the benchmark 10-year government bond yield is about 30
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