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. But barely. The model is expressed in terms of standard deviations to the mean, or sigma. The mean 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. The current valuation level now is a 0.17 sigma premium for stocks, down from a 0.5 two months ago in the wake of the equity sell-off. Other valuation measures also show reasonable (if not discount) multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 19, the midpoint of the normal range. The current S&P 500 dividend yield of 1.2% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 28% 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 now 365 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, it is no surprise that stocks are priced at the high end of the historical range of 5-1.8, given that tech stocks, which have low capital bases, are the biggest component of the market. On price/sales, the current ratio of 3.0 is above the historical average of 1.9 but well below the 4.0 multiple a
