Summary
Our Stock-Bond Barometer asset-allocation model is indicating that bonds are the asset class currently offering the most value. The model takes into account real-time price levels, historical 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 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 level is a 0.24 sigma premium for stocks, down from 0.5 last month in the wake of the equity sell-off in late February. Other measures also show reasonable (if not discount) 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 29% 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 330 basis points, compared to the historical average of 400. We also look at S&P valuations in terms of sales and book value. On price/book, stocks are priced at the high end of the historical range given that tech stocks, with low capital bases, are the biggest component of the market. On pric
