Perspective On Markets - It's An Age Thing

In effect, both are the markets’ valuation of different types of income stream and we can of course imagine that at times the markets may prefer the ‘certainty’ of a bond, while at other times they may need the flexibility or upside of the income that can be gained from owning equities.

Market strategists have of course long been used to comparing these two valuations (yield gaps or yield ratios be the most common methods) and attempting to identify just when one valuation may be looking extended in comparison to the other. We have conducted just such a broadly conventional exercise in the chart below, simply by using the Shiller PER for the US Standard and Poor’s index compared with the 10-year Treasury bond price, using data for the last ten years.

Measured by this basic metric, US equities seem at present to be relatively expensive in comparison to bonds and, with the consensus currently expecting bond prices to fall still further, one could argue that equity prices are beginning to look quite vulnerable to a significant correction.

USA: Schiller PER Relative to 10yr Bond Price