Other valuation indicators

Today, a few other old-school but useful metrics for whether it's a good time to buy.

Corporate yield spreads: At the lowest, Baa corporate bonds were trading only 150 basis points over 10 year Treasuries. (Data from Bloomberg: .BAA10Y INDEX GP) They've shot up to 500 basis points now, going from extreme optimism to extreme pessimism. What does this tell us? That market is way out of whack - no surprise.

U.S. Treasury TIPS give us a sense of inflation expectations - right now they've plunged off a cliff, from pricing in ~2.5% inflation down to ~1%. (Data also from Bloomberg: USGGBE10 INDEX GP)

Another oldie but goodie: comparing dividend yields with the 10-year government bond rate. The 10-year government bond rate is 2.7% according to the Wall Street Journal - very low - while the dividend yield on the S&P 500 is 3.4%. (The 2008 expected dividend is $28.05, according to S&P's "S&P 500 Payers vs. Non-Payers" table. Dividing that into the 12/1/08 closing price of 816 gives us the 3.4% yield.) This is a return to a very long time ago, when the dividend yield on stocks was higher than interest rates due to the risks associated with stocks. Of course this was long forgotten in the 80s, 90s, and post-2000 in the long boom, but the fact that we're back here is telling indeed - the market is expecting a very, very, very bad ten years.