American Consequences - October 2019

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Right now, stocks are an incredible deal relative to bonds and we’re nowhere near a bubble.

opposite directions). Meanwhile, investors fled to safety... pushing bond prices up and yields down. By 2004, both lines on this chart were moving together again. And that brings us to today... Recently, the 10-year Treasury yields fell to a crazy low level – below 1.5%. Meanwhile, at a P/E ratio of 19, the earnings yield on stocks is above 5%. So this time, bonds are a terrible deal compared with stocks. To get this relationship back on track, either stocks need to absolutely soar, or interest rates need to skyrocket... or both. Now, don’t get me wrong. While this relationship has highlighted some key market moves, it doesn’t have to be perfectly one-to- one today. It’s doesn’t guarantee stocks will continue higher. But it does tell us something about the relative value of different investments. And that’s our big lesson today... We evaluate investments relative to each other. It’s the only way to determine what’s cheap or expensive... and a good deal or a bad deal. Right now, stocks are an incredible deal relative to bonds and we’re nowhere near a bubble. Take advantage of it.

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American Consequences

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