Friday, December 20, 2013

Reviewing the current state of valuation:

10 yr Treasury:  2.94%
S&P 500 PE 15  (forward earnings $120, index level around 1810)
E/P is 6.66%

S&P 600 (small cap) has a PE of around 18.
E/P is 5.55%

Small cap E/P tends to be smaller because the growth expectations are larger.

So with the S&P 500 spread of earnings yield  to 10 yr treasuries of 3.7%, that puts us in a favorable range for stocks going forward.  Anything below 2.5% and I would increase my bond weighting.  Right now, the indicator is pointing to increased equity, though it is now the lowest in the last few years.  But still a huge positive versus where we saw the indicator in 2007 and 2008 (around 0% risk premium for stocks).

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