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To: MythMan who wrote (172340)6/12/2002 6:47:02 PM
From: Oblomov  Respond to of 436258
 
IMO, the model doesn't work as well for historically low or historically high yields. The reason is that the model has missing variables (as do all models) that have significant influence at the tails of the 10-year yield. Low yields correlate with high economic risk, so the equity risk premium should be higher when yields are very low. High yields correlate with inflation and the concomitant effects on corporate financial planning - thus, a higher risk premium. The relationship of valuation to P/E and 10-year yield is probably roughly inverse for "middle" yield and P/E values. So the Fed model is likely accurate for middle values, inaccurate at the tails. IMHO.



To: MythMan who wrote (172340)6/12/2002 7:19:39 PM
From: Les H  Read Replies (2) | Respond to of 436258
 
It was under 5 percent until the late 60s.

stls.frb.org

I suspect the differential between the S&P 500 dividend yield and the interest rate was close to zero, whereas the difference now is minus four percent. Wouldn't that require the earnings yield to be much higher (i.e, a lower P/E) to achieve fair value for the comparable interest rate?


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