Source: The Wall Street Journal
Federal Reserve Chair Janet Yellen discusses market risks and other issues with International Monetary Fund Managing Director Christine Lagarde at the Institute for New Economic Thinking Conference on Finance and Society at the IMF in Washington.
She also acknowledged stocks aren’t quite so pricey when compared to bonds. And that’s an important caveat, because it’s bonds, not stocks, whose valuations are extreme; so extreme they make stocks positively cheap.
The two are very much connected. Bonds are expensive for the same reason stocks are cheap: the world is still afraid of disaster. And that holds important lessons for both the investors, and the Fed.
Stocks are expensive, based on the most common valuation metric: Standard & Poor’s 500-stock index trades at 17.5 times last year’s earnings, well above the 10-year average of 15.8. But that’s not the best metric of stock valuation; a better one is to ask how much stocks are likely to return over the next decade or so compared to bonds. Den Rest des Beitrags lesen »