Since the beginning of October, the S&P500 has fallen almost 20%. The fall began with the spike in 10-Year Treasury yields in early October. When 10-Year yields breached technically and psychologically important levels, investors changed the lens with which they look at factors affecting the market.
There are many measures of inflation. This Spotlight focuses on four:
1. The Consumer Price Index (CPI)
2. The Core CPI (excludes the volatile food and energy components)
3. The Personal Consumption Expenditures Price Index (PCE)
4. The Core PCE (excludes the volatile food and energy components)
If yields are the same a year from now as they are today, then at 3.3%, the 7-Year Treasury has the highest expected one-year total return.
Behold the S&P500’s historical price earnings ratio as compared to its long-term average over the last 50 years.
By this measure, across all inflation levels, stocks are expensive.