summary
The stock/bond asset allocation model, which we call the stock-bond measure, suggests that bonds are the asset class that offers the most value at the current market stage. Our model takes into account real-time levels, growth rates, expectations of government and corporate fixed income returns in the short and long term, inflation, stock prices, GDP, and corporate profits, among other factors. The output is expressed in terms of standard deviations of the mean, or sigma. The average reading from the model, which goes back to 1960, is a modest equity premium of 0.09 sigma, with a standard deviation of 1.05. In other words, stocks typically sell for a slight premium valuation, which they have been since inflation started rising in 2022. The current valuation level is now a 0.45 sigma premium for stocks, reflecting in large part an upward move in long-term interest rates. . Since the beginning of the fall and the conclusion of the elections. Other valuation metrics also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is about 21, within the normal range of 15 to 24. The S&P 500’s current dividend yield of 1.2% is below the historical average of 2.9%, but it is also 26% of the 10-year Treasury yield, compared to the long-term average of 39%. Moreover, the gap between the S&P 500 dividend yield and the benchmark 10-year government bond yield is about 30