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Relative valuations

When investors try to allocate capital they need to observe among other things two valuation metrics: absolute valuations, or how cheap/expensive an asset is vs his expected cash flows (or other metrics), and relative valuations, or can I find a better alternative in another asset class with potential different risk characteristics. As you can see in the chart below, If you compare the relative valuations of stocks vs bonds, using a simple metric such as P/E, you’ll find they are almost equal at this point, slightly favoring equities. Distorsions such as an inverted yield curve, wide differences in valuations among equity sectors, etc may make averages not overly representative of the market as a whole, but now asset allocators should not have preference between both asset clases.


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Chart source: Fidelity



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