Summary
We have different ways of looking at market valuations. Most are signaling that stocks are reasonably valued, but not bargains. Our asset-allocation model, the Stock/Bond Barometer, suggests that the two major portfolio asset classes are near parity for valuation. The model goes back to 1960 and takes into account the likes of real-time price levels, historical growth rates and forward-looking forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings. The output is expressed in standard deviations to the mean, or sigma. The mean reading is a modest premium for stocks of 0.18 sigma, with a standard deviation of 1.07. So stocks normally sell at a slight premium compared to bonds. The valuation level now is a 0.60 sigma premium for stocks, not a discount but within the normal range. Other measures also show reasonable multiples for stocks. The forward P/E ratio for the S&P 500 is 20, within the range of 15-24. On price/book, stocks are priced at the high end of the historical range of 5.5-1.8, given that tech stocks, with low capital bases, are the biggest component of the market. The current S&P 500 dividend yield of 1.03% is below the historical average of 2.9%, but the relative reading to the 10-year Treasury bond yield is 24% compared to the long-run average of 39% and the all-time low of 18%. On price/sales, the current ratio of 3.5 is above the historical average of 1.8, but