Daily Spotlight: Stocks Now the Undervalued Asset Class

Summary

Our stock/bond asset-allocation model, which we call the Stock-Bond Barometer, has reversed conclusions in the past month and now indicates that stocks are the asset class offering the most value at the current market juncture. In large part, the changed reading reflects the substantial move lower in interest rates. Our model takes into account current levels and forecasts of short-term and long-term government and corporate fixed-income yields, inflation, stock prices, GDP, and corporate earnings, among other factors. The model 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 modest premium for stocks of 0.16 sigma, with a standard deviation of 0.98. The current valuation level is a 0.12 sigma discount for stocks, which is now below fair value and down sharply from a 0.85 sigma premium at the end of 3Q. Other valuation measures also show reasonable multiples for stocks. The current forward P/E ratio for the S&P 500 is approximately 18, which is within the normal range of 10-21 and down from 23 at the end of 2021. And the current S&P 500 dividend yield of 1.5%, while below the historical average of 2.9%, is up from an ultralow 1.2% (also in 2021). Looking ahead, we expect the results from our valuation model to continue to improve, as interest rates decline in 2024 and EPS growth picks up. Based in part on the output from our Stock-Bond Barometer, our current recommended asset-allocation model for moderate accounts is 70% growth assets, including 68% equities and 2% alternatives; and 30% fixed-income, with a focus on core and opportunistic segments of the bond market. On duration, we recommend focusing on the short end of the curve.

Source: finance.yahoo.com