Over the past year we’ve highlighted that equities, on many measures, appear to be as cheap to U.S. Treasuries as they have been in decades. Stocks’ earnings yield (the inverse of the price-to-earnings ratio) has been substantially higher than the yield on the 10-year U.S. Treasury for the past couple of years.1 The spread is especially high by historical standards, suggesting that stocks may be a much more attractive prospect than Treasuries in the coming years. In recent months, however, stocks have started to appear attractively valued when compared to other sectors of the fixed income market.
Looking at this week’s OppChart, we see the earnings yield on the S&P 500 Index recently surpassed the yield on the JPMorgan Domestic High Yield Bond Index2 for the first time since the index began in 1999. This suggests that stocks may be attractive investment opportunities versus even high yield bonds. Let’s be clear. For investors that maintain fixed income exposure, we continue to favor high yield over Treasuries. However, we recognize that stocks now appear to be cheap to not only high grade but also higher-yielding bonds. And, as my colleague Art Steinmetz pointed out here recently, high relative earnings yields may bode well for future stock returns.
1. FactSet, 12/31/12. The earnings yield is calculated as earnings divided by price. Past performance does not guarantee future results.
2. The S&P 500 Index is a broad-based measure of domestic stock market performance. The JPMorgan Domestic High Yield Index is an index composed of non-investment-grade corporate bonds. Each index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Past performance does not guarantee future results.
Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a Fund’s share price can fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Diversification does not guarantee profit or protect against loss.