Some of Wall Street's most trusted metrics suggest stocks are in a bubble, while others say they're cheap.
But because bond yields are as low as they've ever been, measurements that compare stock prices to bond yields aren't setting off any alarms. By those lights,A lot is at stake, especially if the market is unsustainably expensive and a big downturn is imminent. Jim Paulsen, chief investment strategist for the Leuthold Group, is telling clients that the best way to make sense of conflicting signals is to combine them.
that should also not be ignored." Large-scale monetary and fiscal stimulus, low inflation, and record-low bond yields are some features of these unique times. . He writes that a simple way to do that is to divide US corporate profits by the 10-year Treasury yield, and then divide price of the S&P 500 by the resulting number. That will give them a general idea of how expensive stocks are compared to the value of future earnings.
Paulsen adds that traditional P/E measurements like the Shiller ratio and his YAPE version all have strong track records, but that P/E measurements have consistently overestimated the market's downside for the past three decades.
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