Tuesday, 14 January 2014

US stocks fall as earnings yield narrows gap with Treasury yield

US stocks fell on Monday.

The S&P 500 declined 1.3 percent, the most in two months. It is down 1.58 percent so far in 2014, the worst start to a year since 2009.

A Bloomberg article suggests that stocks may have lost their allure as valuations have become stretched.

Rising Treasury yields and the biggest equity market rally in 16 years are leading one measure of stock valuations to the most bearish level since 2011.

Profits as a percentage of the Standard & Poor’s 500 Index’s price, known as the earnings yield, totaled 5.76 percent last week, compared with the 2.86 percent payout on 10-year Treasuries, according to data compiled by Bloomberg. At 2.9 percentage points, the gap, which narrows as equities get more expensive relative to debt, is the smallest since March 2011.

The last time spreads between bond and earnings yields were this compressed, the S&P 500 posted its biggest retreat of the bull market, falling 19 percent between April and October 2011...

“We are due for a correction,” said Peter Sorrentino, who helps manage about $14.8 billion at Huntington Asset Advisors in Cincinnati and is buying options to protect against a decline in the stock market. “It’s not a question of if, but how bad.”

And the WSJ's MoneyBeat blog noted on Monday that Goldman Sachs has raised concerns about the market's valuation.

“S&P 500 valuation is lofty by almost any measure,” David Kostin, equity strategist at Goldman Sachs, wrote in a research note to clients. “We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than [price-to-earnings] expansion.”

However, while many analysts now seem to acknowledge that the US stock market is fully or even overvalued, few expect stocks to fall this year. Goldman Sachs, for example, still sees the S&P 500 rising to 1,900 at year-end for a 3% gain.

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