Investment Office

Excerpts:

“Nothing has changed valuation-wise since last year, other than the fact, that the market as a whole, is growing more expensive; but with rates falling from 3% to less than 2.5% the ratio of earnings yield to bond yield is being dynamically maintained.”
…

“When this distance is negative, it is only natural that money moves out of treasuries and into blue chips (dividend stocks). It is interesting to see that this move reversed when the gap between treasury yields and dividend yields reached close to 2% - the current ratio is 0.60%. For a reversion to 2 % to come about, dividends would have to stay flat or fall while interest rates would have to rise to at least 3-3.5%. However, as long as treasuries keep rallying and interest rates keep falling, equities will remain undervalued and continue to rally. It is interesting to note that the money flow into equities was weak today, which is not normal for a Friday, especially at the end-of the month. Low volatility stocks outperformed their high beta counterparts and the utility sector was uncharacteristically strong for an up-day in equities. This supports the theory that investors are looking for yield and not growth.”