Summary
Our asset allocation model between stocks and bonds, which we call the Stocks and Bonds Barometer, indicates that bonds are the asset class that offers the most value in the current market environment. Our model takes into account real-time levels, growth rates and forecasts of short- and long-term corporate and government fixed income returns, inflation, stock prices, GDP and corporate profits, among other factors. The result is expressed in terms of standard deviations from the mean or sigma. The model’s mean reading, going back to 1960, is a modest premium to equities of 0.09 sigma, with a standard deviation of 1.05. In other words, stocks typically sell at a slight valuation premium, which they have since inflation began to rise in 2022. The current valuation level is now a 0.45 sigma premium for stocks, reflecting in largely the increase in long-term interest rates. since early autumn and the conclusion of the elections. Other valuation measures also show reasonable multiples for the stock. The current forward P/E ratio for the S&P 500 is approximately 21, within the normal range of 15-24. The S&P 500’s current dividend yield of 1.2% is below the historical average of 2.9%, but is also 26% of the 10-year Treasury yield, compared to the long-term average of 39%. Furthermore, the gap between the S&P 500 earnings yield and the benchmark 10-year government bond yield is about 30