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Non-Tech : NOTES
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To: Davy Crockett who wrote (1828)5/10/2002 11:59:30 AM
From: Didi  Read Replies (1) of 2505
 
S&P: "Economic and Investment Outlook"

Hi Peter!

Di

===================================

"Economic and Investment Outlook"
standardandpoors.com

bloomberg.com

===========================================

drsohn.com

Selected highlights + rearranged some.

>>> Fed’s stock valuation model

Valuation models
... are not especially useful for short-run market timing, but
... they do offer a benchmark for determining value that can be useful for long-term investors.

The model compares the 12-month forward earnings yield of the S&P 500 index to the yield on the 10-year Treasury bond.

The idea focuses on bonds as an alternative investment to stocks and, in order to justify holding one or the other, you must compare the relative return over the coming year.

The 12–month forward earnings yield
...is the consensus forecast of S&P earnings per share over the next 12 months divided by the level of the current S&P 500 index.

When the S&P 500 earnings yield
... is below the bond yield, stocks are overvalued,
........ if it is above, stocks are undervalued.


Theoretically, stocks should be valued on all future discounted earnings and an additional risk premium should be added to account for the higher volatility of stocks over bonds.
... However, empirical evidence shows that the values of these variables nearly cancel each other out in practice, making the simple model a good approximation.<<<
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