Sunday, 16 September 2012

10-year Average Earnings- and Dividend Yields, S&P 500 (as of 14.09.2012)

Earnings - and dividend yields as of 14.09.2012

Based on the closing price of the S&P 500 index of 1,465.77 on 14 September 2012 and data from Professor Robert Shiller's home page, the current yields are as follows (please refer to June 2012 analysis for further background information):

The S&P earnings- and dividend ratios declined a bit in September compared to the August 2012 report as the index increased 6.6% (1 August to 14 September). The current earnings yield still remains higher than the average since 1991, but the dividend yield is now below average.

The spread (the difference between earnings yield and interest rate) narrowed as a result of the price increase of the index, dropping from 3.12% reported in August to 2.93%. The spread remains considerable higher than the average since 1991. One (of many) likely reason for this, as reported last time, is that bond yields are artificially low due to the support from the Fed.

On balance, the S&P 500 index is a bit cheaper than its historical average. Although the current earnings- and dividend yields are less attractive than last month, the overall conclusion remains largely unchanged from last month,
For the long-term investor, the current yields by themselves indicate the market is a bit cheaper than average in a historical perspective and that by itself might indicate this is not a bad time to go long the index. Chances are also the Fed will continue to support the stock market by keeping interest rates down for the foreseeable future and to continue to further increase the money supply. But, there are problems ahead and chances are that this time Europe will ignite the next financial panic. Valuations will then become much more attractive than now. But relative to bonds, the S&P 500 is a much more attractive investment for the long term investor.
Since the previous report, the Fed announced further "quantitative easing" (i.e. money printing) and promised to keep the federal funds rate close to zero "at least through mid-2015". This will clearly result in interest rates remaining low for the foreseeable future.


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