I found this interesting (the rise) however I have my own reservations because of the possible change in rates and inflation in 2017. When inflation rises, interest rates also normally rise to maintain real rates within an appropriate range. PE ratios need to decline to reflect the increase in the earnings discount rate. Another way to look at it is that equities then face more competition for money from fixed income instruments. The cost of equities must therefore decline to keep or attract investors. Then there is the Rule of 20 to consider. Rule of 20 equals P/E + long term interest rates (average of 10 and 30 yr bond rates). If at or below 20 minus inflation -- the market is a buy. If above 20 minus inflation -- the market is a sell. Today we're at just about 20. I think I'll keep my cautious side up. Keep moving up my alerts and stick to only brief swings. Something tells me it's going to be an interesting year. All focus on the Fed and inflation.
During the past week (
This week’s EVA brings the second edition of our new Random Thoughts format. The goal with this approach is to cover several key, but often unrelated, topics in a quick overview fashion.
In this issue, we are looking at, once again, the powerful financial force known as credit spreads. Fortunately, they are not indicating financial stress at this time. We are also examining the supposed truism that this is one of the most detested bull markets of all time. Then, we wrap up with a look at the Fed’s and Wall Street’s forecasting track record (hint: both make a dart-board look good!).
As always, your feedback is welcomed and appreciated.
When the spread isn’t the thing. One of the themes this newsletter has emphasized most heavily this year has been the importance of the spread—or difference—between government and corporate bond yields. As we have repeatedly cited, when that gap is widening in a pronounced way bad things tend to happen both to the economy and financial
Which one of these statements is true?
Both are, thanks to quirks of the most popular way of measuring a stock's valuation: the price/earnings ratio.
While no one disagrees about what the "P" is when calculating the ratio, there is no consensus on how to define earnings-per-share. One of the biggest points of dispute: whether to use analysts' earnings estimates for the coming year or reported company earnings from the previous 12 months.
Comparing ratios calculated in these two ways is little better than comparing apples to oranges, according to Cliff Asness, managing partner at AQR Capital Management, an investment firm with $84 billion of assets under management. In an email, he went so far as to say that those who compare P/Es in this way are engaging in a "sleight of hand," though he allowed that many may "not be aware of the mistake they are making."
Consider the S&P 500's current P/E based on trailing