Today’s Valuations

BELOW IS A LOOK at current market valuations:

  • At year-end 2021, the stocks in the S&P 500 were trading at a price-earnings (P/E) ratio of 30, based on trailing 12-month reported earnings, making them very expensive by historical standards. Keep in mind that the market’s P/E was driven higher by the hit to company profits that accompanied 2020’s economic turmoil. As corporate earnings have recovered during 2021, the market’s P/E ratio has come down.
  • The S&P 500 stocks ended 2021 at a cyclically adjusted price-earnings (CAPE) ratio of 40, versus a 50-year average of 20.9. CAPE compares current share prices to average inflation-adjusted earnings for the past 10 years.
  • As of 2021’s third quarter, stocks were at a 70% premium to the value of corporate assets. This measure of stock market value is known as Tobin’s Q.
  • U.S. equity real estate investment trusts fell hard during the early 2020 stock market selloff, but have since come roaring back, including strong gains in 2021. As of November, equity REITs were yielding 2.8%, close to the lowest yield in the FTSE NAREIT index’s 50-year history.
  • The benchmark 10-year Treasury note was yielding 1.51% at year-end 2021, versus 0.92% at year-end 2020. Based on the difference between that yield and the yield on inflation-indexed Treasurys, the financial markets expect inflation of 2.6% a year over the next decade.
  • At year-end 2021, high-yield junk bonds were yielding 3.1 percentage points more than Treasurys, down from 8.8 percentage points 21 months earlier, as worries about junk-bond defaults eased.

Next: Asset No. 1: Stocks

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