One very simple way of looking at the stock market’s valuation is to compare it with how well long-term bonds have been doing. Over the long haul, stocks have outperformed bonds by a bit, but that fact has been thrown into disarray this decade.
Since the market peaked in March 2000, bonds have pummeled stocks. In fact, bonds have beaten stocks so badly that they’ve erased the entire lead accumulated over the past 40 years.
Here’s the fact that surprised me: While stocks have rallied since March, when compared with bonds the rally was dramatic but short. After plunging in February, stocks only beat bonds from March 5 to May 8 (I’m using VFINX for my stock proxy and VWESX for my long-term corporate bond proxy). Since May 8, bonds have slightly beaten stocks, plus they’re far less volatile.