Inspired by this amazing analysis!
The analysis grabs your attention with an amazing "fact", as clear as daylight
Fact: Stocks remain attractively valued.
He then proceeds with some other facts:
Everyone likes to talk about PE ratios, but not too much mention is made of interest rates. Interest rates are just as important as earnings when we assess equity market valuations. And one of the most popular benchmarks for interest rates is the current rate offered on the US 10-year Treasury Bond. In this 15-year visual comparison of the US 10yr rate vs. the S&P 500 earnings yield, we can see that the premium between the two is currently larger today than it was during 2002 thru 2006 (which many consider to be a time of more "normal" markets). That is, given today's interest rate environment and the current earnings associated with the S&P 500, stocks are actually less expensive today when compared to the pre-recession markets.
and rambles about stocks being "less expensive" because the equity yield premium was 3%. As a "proof" he gives 1-y return for 3 data points ... and correlates them with their respective 10-y equity premiums. Makes perfect sense.
I found it funny and decided to test the theory in practice. I calculated the 10-y equity premiums (10-y bond yields - trailing year equity yield) using data from this website, and plotted it against the S&P 500 10-y inflation adjusted return (dividends reinvested) for the period 1970-2017.
Here is the result:. The 10-y equity premiums has a 5% correlation, less then an alphabetical selection of stocks. Shiller P/E (and also the inverse, the yield) has a 56% correlation, which is still flawed, but at least exists.
Submitted June 13, 2017 at 11:54AM by nathan_macron http://ift.tt/2thG3rm
