Abstract
Our stock/bond asset allocation model, which we call the Stock and Bond Barometer, shows that bonds are the asset class that offers the most value at the current market moment. Our model takes into account 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. Output is expressed as standard deviations from the mean or sigma. The median reading from the model, since 1960, is a modest stock premium of 0.09 sigma, with a standard deviation of 1.05. In other words, stocks tend to sell for a slight valuation premium, which they have since inflation started to rise in 2022. The current valuation level is now a 0.45 sigma premium for stocks, largely reflecting the increase in long-term interest rates since the fall and the end of the election. Other valuation measures also show reasonable multiples for the stock. The current forward P/E ratio for the S&P 500 is approximately 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 10-year Treasury yield, compared to the long-term average of 39%. Furthermore, the difference between the S&P 500’s earnings yield and the benchmark 10-year Treasury yield is about 30
