Despite the increase in stock prices since the summer, equities now look even cheaper against corporates, due to the strength in the corporate bond market, according to Brian Reynolds. The ratio of stock yield versus corp bond yield on 8/04 had stretched valuation measures between them to the widest levels since after the ’87 crash (using a Fed model variation), Reynolds says.

Stocks versus Bond Yield

click for larger chart

Stock_yield_as_a_percentage_of_bond_yiel

source: MS Howell & Co.

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He cautions, however, that cheap looking equities are no guarantee of price rises. The wide swings in these series reveal little correlation between stocks and bond yields. Wide disparities in valuations can reveal when buyers are becoming too aggressive in one asset class or the other.

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Quote of the Day:

“When everybody starts looking really smart, and not realizing that a lot of it was luck, I get scared.”       -Raphael Yavneh

Category: Markets

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