This article will address the relative valuation of the US market wrt the 10-yr Treasury. The market's price to earnings ratio (P/E) can be computed by dividing the market index by the earnings, and is readily available. The inverse of this is the earnings yield, represented as a %. The dividend yield of the market as a whole is similarly computed. For example, the earnings yield of the S&P500 is about 6.6%. The dividend yield is 2%.
And what is the 10 yr bond yield? A rather lean & mean 2%! Exactly equal to the market dividend yield. Since the market price is just the net present value (NPV) of all future dividends, it is appropriate to compare this with the 10 yr bond yield.
The bond yield does not compound with time. While the dividend yield does. So while the stock market has gone up 125% from the March 2009 low, it still appears to be more attractive than the ten year bond. Well, not very surprising. Because the bond market has been on a 10 year bull run.
While I do not have the 10 yr yield in Oct 2007, I suspect it was around 5%. And the stovk market dividend yield? Around 1.5. Clearly 5% is much greater than 1.5%. The bond market was more attractively priced in October 2007. The rest is history.
It is that simple. Of course, those who read Investment 001 would have already set their asset allocation. And would be balancing the allocation maybe 3 times a year. For them, this article is nothing more than of academic interest.
About the writer: he is never known to lose his Cool. And never participates in heated arguments.
The last. line of 3rd para from bottom should read " bond market has been on a 30 year bull run."
There may be a bubble in German bonds also. Not sure this has anything to do with frugality or cockiness. Lots of demand so price high. I expect ylds to go higher I. 12 months.