greensleeves

Fed Model Update: Stocks Are Cheap Compared to Bonds

I used to have a chart by Graham & Dodd showing the "fair" relationship between growth rates and P/E for stocks, and it had several lines, one for each of several rate environments. It seems to me that the real equity risk premium now is high - meaning risk adjusted returns will be better in stocks. The valuations are highly dependent on future growth rates, not 2008 rates, but the market is focusing on these. I'd also point out that the SPX would need to increase about 100% ( not 50% as you say) to get to the predicted value of the Fed model. But I guess that isn't important since as we now know from prior comment - stocks are risky and therefore way too expensive. In fact the US stock market is the most expensive in the world!