Chart of the Week - Stocks vs Bonds
The past does NOT equal the future: indicator shows shifting risks...
Chart of the Week - Stocks vs Bonds Relative Value
Stocks vs Bonds: Thanks to the surge in bond yields, stocks are looking increasingly expensive vs bonds. This fact along with numerous leading indicators pointing to recession increasingly shifts the odds in favor of bonds (vs stocks).
This week’s chart (which comes from our Q4 Strategy Pack), shows the combined view of the Equity Risk Premium [inverted] and the spread between absolute valuation scores for equities and bonds.
The higher the indicator is the more expensive stocks are relative to bonds (and the greater the odds are that bonds outperform stocks over the medium-term). And as you might guess, the lower it is the cheaper stocks are vs bonds (and the greater the odds are that stocks outperform bonds e.g. the low readings in 2009 and 2020).
As things currently stand stocks are expensive vs bonds, and expensive vs their own history, and bonds are similarly increasingly looking outright cheap (as well as being cheap vs stocks).
While stocks have had an amazing run vs bonds since the 2020 bottom, we should not expect a repeat of this performance going forward. We always get told in those boilerplate investment disclaimers that the past =/= future, and in this case it is actually sage advice, and along with the mounting evidence, should well be heeded!
Key point: Stocks expensive, bonds cheap; as such bonds likely outperform stocks.
n.b. Check out the full archives of the Chart Of The Week for more charts.
Aside from the Chart Of The Week, this email gives you a brief overview of what was covered in our latest Weekly Insights Report (this email provides a free preview of the Topdown Charts premium service on Substack).
Topics covered in the latest Weekly Insights Report
Aside from the chart above, we looked at a bunch of other charts across some important and interesting macro/asset allocation issues:
Risk Pulse: global equities breadth turning down, risk pricing turning up
Market Currents: long-term yields +USD breaking higher, commodities mixed
Gold Price Outlook: weighing short-term capitulation risk vs the strategic case
Macro/Market Radar +Quarterly Pack: what’s on the agenda, webinar details
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Callum Thomas
Head of Research and Founder at Topdown Charts
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