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Valuation conundrum

We are at an interesting juncture in terms of assert class valuations: short term treasuries, US corporate bonds and the S&P earnings yield, which is the ratio of 12 month expected earnings divided by the value of the index, are basically identical. In theory, that means an investor should have no preference investing in one of the three asset classes vs the other two. Volatility, yield curve inversion, and other factors may affect the decision, nudging investors into corporates or treasuries vs equities. Additionally, the averages, particularly in the case of the S&P500, do not accurately represent the market at his point, since there’s a lot of dispersion between the valuations of its members. Over the last 10 years, investors were never in this conundrum, and it’s increasingly difficult to justify Asset allocation decisions based on valuations, which is what responsible investors should do.


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