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« The Key Market Question and Pre-Holiday Musings | Main | Handling Short-Term Volatility with a Longer-Term Method »

November 23, 2007


Mike C

Just my opinion, but with the recent moves in the stock and bond markets, I would think now is a particularly opportune time to revisit the valuation question in terms of what to do now.

The 10-year closed at 3.8% while the S&P 500 is trading at 15x forward estimates which is a forward earnings yield of 6.7%. I don't know the range of the historical spread off the top of my head, but I gotta think that's up there at the high end of the range.

Let's put aside the question/issue of individual sector/stock-picking where there are always opportunities and just look at the question of buying the S&P 500 versus buying the 10-year note versus holding cash or at least some percentage in cash.

According to the Fed Model metric, I would assume that stocks in aggregate as measured by the S&P 500 are a screaming no-brainer buy right now, and that one should be selling bonds, taking cash to 0%, and going 100% in an S&P 500 index fund right now based on that valuation measure. Please correct me if I am incorrect on that point.

With the S&P 500 down roughly 10% off the peak, and a divergence of opinions out there, both bullish and bearish, I would think now is one of those times when having a clearly stated, on the record view is important.

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