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Category: Valuation

Is the Fed Model a Good Valuation Tool?

Should investors use bond yields as a baseline to determine if stocks are over-or-under valued? If you believe in the “Fed Model,” your answer is “yes.” The model instructs investors to compare the S&P 500’s earnings yield (Earnings/Price, the inverse of the P/E ratio) to the 10-Year Treasury yield: If the Earnings Yield is above the […]

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“Lower interest rates justify a higher than average price-earnings valuation.” – Pundit You’ve heard the story before: Equity valuations are high… Interest rates are low…. Data sources for all charts/tables herein: Robert Shiller (http://www.econ.yale.edu/~shiller/data.htm) Ergo, high valuations are “justified” by lower interest rates. Why? Some argue that because stocks are the present value of future cash […]

Just How Overvalued are US Equities?

By almost any metric imaginable, U.S. equities are “overvalued.” But by how much is a topic of constant debate, as it is dependent on a) the valuation metric used (ex: P/E, P/B, P/FCF, etc.), b) the length of historical data over which you are comparing to (ex: average P/E over last 10 years, 20 years, […]

Valuations and Bear Markets

U.S. equity valuations are high. How high? In January, the CAPE (Cyclically Adjusted P/E) ratio rose to 33.76. This is more than double the average historical CAPE Ratio since 1900. It is also higher than every period in history with the exception of the late 1990s on the way up (February 1998 onward) and early […]

When Mean Reversion Fails

Are equities overvalued? Is the economic expansion long in the tooth? — In attempting to answer these questions, we often look to averages: -What is the average valuation? -What is the average length of an expansion? We then take the present environment and compare that to the average past to make definitive statements about the […]