Valuation bloat in stocks, bonds is catching up with bull market

Valuation bloat in stocks, bonds is catching up with bull market

Stocks















Bloomberg

The economic cycle is advancing to a point where valuations may finally matter again for stock and bond investors.

Fortress-like in their refusal to bend for the better part of a decade, both asset classes have come under pressure thanks to the ever-stiffening resolve of central banks to restore order to the global economy. The S&P 500 has dropped in five of the last six days while yields on 10-year Treasury notes is set to break a streak of seven straight increases.

While interest-rate hikes get all the press, an equally big problem for bulls is valuations, with years of price appreciation leaving equities and fixed-income at nosebleed altitudes relative to cash flows.

A novel way of measuring the bloat was proffered in a note by JonesTrading, which added together the S&P 500’s earnings yield and the interest rate on 10-year Treasuries. Combined, the total yield — what the firm called its “reverse Fed model” — stands at 7.2% today, even with the run-up in bond rates. That’s lower than 93% of the time since data began in 1962.

Worse, income from the assets is dwindling due to inflation.