Key Metric Makes Case For Stocks Over Bonds
The volatility index, or VIX may be showing no fear but some investors are clearly jittery. Morningstar reports that mutual fund investors pulled a net $3.3 billion from stock portfolios in May, while adding a net $13.2 billion to bond funds. Yet a telling stock v. bond metric suggests now is not the time to be bailing on stocks in favor of bonds.
When the S&P 500 earnings yield (inverse of PE ratio) is higher than the yield on the 10-year Treasury note, stocks are considered to be the better value. The higher the earnings yield, the better. And the bigger the magnitude of the gap between earnings yield and the 10-year T note rate, the better. While the gap has narrowed a bit recently, it is still very wide:
Since 1945, the index’s earnings yield has been an average of 1.6x the level of the 10-year Treasury, according to S&P Capital IQ’s Sam Stovall. At recent levels we’re above 2.0x. James Tierney, Jr., head of concentrated U.S. growth at Alliance Bernstein, called out this ratio as a signal that stocks look “very attractive.”
Yet Exxon Mobil isn’t even among the earnings yield leaders within the Energy sector—a pocket of the market that historically has done quite well in the later stages of a bull market.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.