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Today’s Valuations

BELOW IS A LOOK at current market valuations:

  • As of year-end 2020, the stocks in the S&P 500 were trading at a price-earnings (P/E) ratio of 37.9, based on trailing 12-month reported earnings, making them very expensive by historical standards. Keep in mind that the market’s P/E is being driven higher as corporate profits take a hit amid the current economic slowdown.
  • The S&P 500 stocks ended 2020 at a cyclically adjusted price-earnings (CAPE) ratio of 34.2, versus a 50-year average of 20.7. CAPE compares current share prices to average inflation-adjusted earnings for the past 10 years.
  • As of 2020’s third quarter, stocks were at a 134% 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 stock market selloff of February and March, but have recovered somewhat since then. As of December, equity REITs were yielding 3.6%, below the 10.1% peak hit in February 2009, but above the 3.1% low of April 2013.
  • The benchmark 10-year Treasury note was yielding 0.92% as of Dec. 31, versus 1.92% at year-end 2019. Based on the difference between that yield and the yield on inflation-indexed Treasurys, the financial markets expect inflation of 2% a year over the next decade.
  • As of year-end 2020, high-yield junk bonds were yielding 3.8 percentage points more than Treasurys, down from 9.2 percentage points nine months earlier, as worries about junk-bond defaults eased somewhat.

Next: Asset No. 1: Stocks

Previous: Financial Markets

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