Summary
Our stock/bond asset allocation model, which we call the Stock-Bond Barometer, identifies bonds as the asset class that offers the most value at the current point in the market. Our model considers real-time levels, growth rates, and forecasts of short- and long-term government and corporate fixed income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The output is expressed in terms of standard deviations to the mean, or sigma. The mean reading from the model, going back to 1960, is a moderate premium for stocks, of 0.09 sigma, with a standard deviation of 1.05. In other words, stocks typically sell at a slight premium valuation, which they have done since inflation started to edge higher in 2022. The current valuation level is now a sigma premium of 0.45 for stocks, which reflects largely the higher move in long-term interest rates since early autumn and the end of the election. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is around 21, within the normal range of 15-24. 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 yield on 10-year Treasury bonds, compared to the long-term average of 39%. Furthermore, the gap between the S&P 500's earnings yield and the benchmark 10-year government bond yield is about 30.