By One Measure Stocks Are Cheapest In Over a Half Century
There is a vociferous ongoing debate about current stock valuations. Some argue that stocks are "dirt cheap" while others flatly disagree.
To illustrate, below is a chart of the price-to-earnings ratio of the S&P 500 using an average of its trailing five year earnings, my preferred method (data from Robert Shiller):
By this measure, stocks currently trade at a p/e of about 20, just above their 50-year average of roughly 19. Certainly this does not mean stocks are cheap.
However, everything is relative and comparing stocks' earnings yield (earnings divided by price) to that of the 10-year treasury bond we see a very different picture. The chart below plots the ratio of these two measures back to 1960:
As the chart demonstrates, for the first time in over 50 years the S&P 500 sports an earnings yield more than twice that of the 10-year treasury bond. Thus investors can safely say that stocks, relative to bonds, are indeed very cheap.
