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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (58389)	5/2/1999 7:53:00 PM
From: Knighty Tin	Read Replies (3) \| Respond to of 132070

T, Here is a way at looking at the market in relative terms, which allows you to eliminate all those discounting formulae. For this example, assume that the investment in either bonds or stocks is in a tax deferred account like a 401K or an IRA: 1. The S&P 500 is selling at 35.41 times trailing 12 month earnings. That is an earnings yield of 2.82%. Historically and even during our current economic miracle, the 500's earnings have grown at about 5.2% a year. The dividend yield is 1.24%. 2. The 30 year zero coupon bond is yielding 5.88%. Take the 1.24% equivalent of a dividend yield out for spending cash and compound the return at 4.64% a year. How many decades do you have to buy and hold before the return on the risky stock holdings catch up to the return on the no risk, if held to maturity, zero coupon bond? Things obviously look better for stocks in taxable accounts, though it still takes more than 15 years for the 500 to match the return on a AAA muni, tax free. Starting out with a yield nearly double on the Treasury and 70% higher on the AAA muni really helps the smarter investor. So, on a relative basis, bonds are a much better buy than the index unless you expect much better than average earnings growth in ther future from this eighth year of an economic expansion, or if you expect the supply of greater fools to never run dry.