Are Stocks Really Cheap Relative To Bonds? Steve Blumenthal asks in his latest Forbes article. An excerpt from the article:
What looks cheap today becomes not so cheap when rates rise and, as you’ll see, the market is certainly “not cheap.”
The Fed’s zero interest policy (6 ½ years and counting) and QE bond buying activities have driven bond yields to historic lows and bond prices to historic highs (bond prices go down when interest rates (yields) rise and go up when interest rates decline).
Seeking yield, investors look elsewhere. High dividend paying ETFs have been a prime beneficiary of those capital flows. Yes, expensively priced stocks look good relative to ultra-low yielding bonds. But it is forward we must set our sights and this is where the “stocks are cheap relative to bonds” argument breaks down. Beware of those high dividend paying ETFs as they are one of the most overvalued areas in the market.
Warren Buffett has a quote I like,
“This is the one thing I can never understand. To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the “Hallelujah Chorus” in the Buffett household. When hamburgers go up, we weep. For most people, it’s the same way with everything in life they will be buying–except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
So what are market valuations telling us today? Based on what you will see, let’s just say this is not a Hallelujah moment. Expect very low forward 10-year returns. Today, we’ll take a look at the most recent valuation data, including Buffett’s favorite valuation measure, and see if we can zero in on what the probable 10-year forward market returns are likely to be.
See the full story in Forbes: Are Stocks Really Cheap Relative To Bonds