There are many ideas about market timing, stock valuation, and financial ratios. Text books, popular finance books, blogs, and television offer a buffet of theories. The goal for all is buy low and sell high, right? But how to do so is not easy.Use the Dividend Yield to Value the Market
, generally there is a 2% spread in either direction between the S & P Index earnings yield and the yield on 10 year treasuries. Last month, with Treasury yields at historical lows, there was a 7% spread between the S & P 500 dividend yield and that of U.S. Treasuries. Stocks may not be a screaming buy, but their long term potential far surpasses that of Treasury bonds.What Will Happen When Yields Rise?
Bonds exhibit an inverse relationship to interest rates. When rates rise, bond values decline. With interest rates near zero, there is only one way for rates to go; up. When the interest rates start their ascent, which is inevitable, bond holders will find values falling. That fact portends low future returns for bonds. Stocks, on the other hand, may not be destined for outstanding future returns, they are certain to outperform bonds.Who Else Agrees with Me?
I'm not the only proponent of comparing the earnings yield with bond yields. In fact, Money Magazine, in their October, 2011 issue puts forth this same thesis in Three Reasons to Love the Slowdown article. Just to be clear, I'm not suggesting that stocks are ready for break out performance. The point here is that it is likely that during the coming decade, stocks will outperform stocks.What do you think?
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