Stock Earnings Yields vs. Bond Yields

This from Agile Investing via our friends at Seeking Alpha. As you’ll see, there’s an amazing confluence of events on the horizon. A possible credit crunch at the same time as bonds are apparently overvalued:

Stock Earnings Yields vs. Bond Yields 1/85-2/07

“J.D. Steinhilber (Agile Investing) submits: The earnings yield for the S&P 500 is at its highest level since 1996. The fact that the S&P 500’s earnings yield is higher than the 10-year Treasury yield suggests that either stocks are undervalued or bonds are overvalued.

We think it is the latter rather than the former and that the valuation gap in the chart below will likely be closed primarily by rising bond yields. Unless the economy is in recession, or emerging from recession, which temporarily depresses earnings yields (e.g. 7-90-2/91 and 3/01-11/01), investors should not expect earnings yields to fall below 5%, which equates to a 20x P/E multiple.”

Not too many paths ahead of the North American economy if this fellow is right.

MRM