I keep hearing if the 10yr T-bill goes up by 1 pt say from around 4.6 to 5.6, then the stock market might be overvalued; Is there any easy calculation available to get some idea about this statement.
2007-04-28 03:50:52 · 3 answers · asked by Gult 1 in Business & Finance ➔ Investing
No. The idea of the above statement is that the bill is in direct competition for your money with the equity markets, but if you think about it, that doesn't make sense. Debt instruments serve a particular purpose in a portfolio, which is quite different from the purpose of holding equity positions. For certain individuals and institutions they are interchangable due to asset allocation requirements or because of a blindness to their underlying structure and functions.
The stock market, in that idea, is a perfect peer to the debt market and so the calculation is basically to take the weighted average PE and invert it to a yield for a given index. The Dow is right now at about a 1 to 1 yield equivalence to the 10 yr Note.
The 10 Year Note does bear inflation risk and some sovereign risk (even though everyone denies it), while the Dow bears some, though less inflation risk, credit risks, added capital market risks, currency risks, event risk and quite a few other risks. They are not peers but they are priced as though they are interchangable at this point.
Given the higher risk, the Dow is materially overpriced, unless one does not require a premium for taking higher risks.
The calculation they are looking at is take the PE of the Dow or any other diversified index, invert it to get the yield and compare it to the 10 year note.
Dumb idea, they are not peers.
2007-04-28 05:10:17 · answer #1 · answered by OPM 7 · 0⤊ 0⤋
PE is typically the most used way. Now the S&P is trading around 17 times earnings which is a bit higher than average. The economy is weakening, corporate profits are no longer growing as fast, and the yield curve is still inverted which leads me to believe we have softer economic times ahead of us, and our stock market PE doesn't accuratly reflect that. Corporate balance sheets, interest rates, and all economic factors should also be looked at when judging whether or not the market is under/over valued.
2016-05-20 23:05:45 · answer #2 · answered by ? 3 · 0⤊ 0⤋
These valuations are based on the existing financial records and average growth rate of n years.
You can find simple stock valuation calculator in this link..
2014-08-08 05:23:58 · answer #3 · answered by Rama 1 · 0⤊ 0⤋