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1、ResearchAssetValuation&AllocationModelsJuly30,2002Dr.EdwardYardeni(212)778-2646ed_yardeni@prusec.comAmaliaF.Quintana(212)778-3201mali_quintana@prusec.com-Introduction-I.Fed’sStockValuationModelHowcanwejudgewhetherstockpricesaretoohigh,toolow,orjustright?Thepurposeofthisweekl
2、yreportistotrackastockvaluationmodelthatattemptstoanswerthisquestion.Whilethemodelisverysimple,ithasbeenquiteaccurateandcanalsobeusedasastocks-versus-bondsassetallocationtool.Istartedtostudythemodelin1997,afterreadingthatthefolksattheFederalReservehavebeenusingit.Ifitisgoode
3、noughforthem,it’sgoodenoughforme.IdubbedittheFed’sStockValuationModel(FSVM),thoughnooneattheFedeverofficiallyendorsedit.OnDecember5,1996,AlanGreenspan,ChairmanoftheFederalReserveBoard,famouslyworriedoutloudforthefirsttimeabout“irrationalexuberance”inthestockmarket.Hedidn’tac
4、tuallysaythatstockpricesweretoohigh.Ratherheaskedthequestion:“Buthowdoweknowwhenirrationalexuberancehasundulyescalatedassetvalues,whichthenbecomesubjecttounexpectedandprolongedcontractions….”1Hedid2itagainonFebruary26,1997.2Heprobablyinstructedhisstafftodeviseastockmarketval
5、uationmodeltohelphimevaluatetheextentofthemarket’sexuberance.Apparently,theydidsoanditwasmadepublic,thoughburied,intheFed’sMonetaryPolicyReporttotheCongress,whichaccompaniedMr.Greenspan’sHumphrey-HawkinstestimonyonJuly22,1997.3TheFedmodelwassummedupinoneparagraphandonecharto
6、npage24ofthe25-pagedocument(seefollowingtable).ThechartshowsastrongcorrelationbetweentheS&P500forwardearningsyield(FEY)—i.e.,theratioofexpectedoperatingearnings(E)tothepriceindexfortheS&P500companies(P),using12-month-aheadconsensusearningsestimatescompiledbyThomsonFinancialF
7、irstCall.—andthe10-yearTreasurybondyield(TBY).TheaveragespreadbetweentheforwardearningsyieldandtheTreasuryyield(i.e.,FEY-TBY)is29basispointssince1979.Thisnear-zeroaverageimpliesthatthemarketisfairlyvaluedwhenthetwoareidentical:1)FEY=TBYOfcourse,intheinvestmentcommunity,weten
8、dtofollowtheprice-to-earningsratiomorethantheearningsyield.TheratiooftheS&P
