<<did barrons include any opposing articles in that issue?>>
Nope. It would have been great if they could have got that English guy, Andrew Smithers, to write a dissenting view. In his book "Valuing Wall Street" (Andrew Smithers and Stephen Wright, McGraw-Hill, 2000), he addresses the "Fed Model" in Chapter 24. His Fig. 24.2 on p. 246 clearly shows that this model was a total and utter failure in the 1950-1968 period. As you pointed out, changes in the equity risk premium over time have in many past time periods been far more important than bond-yield-envy.
Two quotes from Smithers' book follow. Remember that the current low bond yields directly reflect low inflation.
"While the stock market, interest rates and inflation were all rising together in the 1950s and 1960s, it was then believed that inflation was good for shares. The theory used to support that argument was that inflation would boost future earnings and that shares were worth more today because earnings in the future would be higher."
"Yield ratios [as a guide to stock market value] have no economic basis. This is because shares represent the ownership of real assets, while bonds provide an income that is fixed in nominal terms. Shares should therefore provide a protection against inflation, at least in the longer term, that bonds don't provide. Changes in inflation thus cause [bond] interest rates to rise and fall, but there is no reason to expect such fluctuations to affect ... [stock] earnings yields. The ratio of bond yields to [stock] earnings ... should therefore vary with inflation, being high when inflation is high and vice versa." |
