Bill, I see your twin-brother has a different assessment of the Stockmarket Valuation question.......my question is, "which one is the
evil twin brother -vbg-
To the Editor:
Michael Santoli (The Trader, May 24) comments on the relative valuation of
stocks versus bonds. So, let's consider the numbers Alan Greenspan is
looking at. Recently, there was a 5.62% yield on 10-year Treasuries, and a
4.04% earnings yield on the S&P 500. Divide the former by the latter, and
you get 1.392. This tips the comparison 39.2% in favor of Treasuries,
meaning that the S&P is overvalued.
But wait. Let's take the same data and subtract, say, 2% for inflation from
each, and add 3% to the stocks' earnings yielda premium for long-term U.S.
economic growth. That gives us 3.62% net yield for the Treasuries and
5.04% for the stocks. Do the same math again, and stocks seem 28.2% undervalued. Rates would have to go over 7% for stocks to pass above parity with bonds. So, stocks may have a way to go. That's better, isn't it?
JOHN P. MEEHAN
Orlando, Florida
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