Some people say today’s price-to-earnings ratio (P/E) is a sign of overvaluation. Others say it’s a sign of improved earnings growth in the future. In my view, it’s neither. The current valuation of the stock markets doesn’t tell us anything about the future of corporate earnings.
The real yield on Treasury bonds has fluctuated wildly since 2005. The inflation-adjusted yield on the 5-year T-note roamed from 1.1% in 2005 to 2.7% in 2007, down to zero in early 2008, up to 4.3% in late 2008, down to -1.7% in 2012 and today it sits at 0.1%. What is the real yield [...]
I am often asked how market valuation plays into asset allocation decisions. Should an investor consider reducing equity exposure when the market is trading at a high price relative to earnings? My standard answer is no, but in some situations, yes.
A recent tax article written for Forbes by William Baldwin caught my eye. The article discussed how a hypothetical wealthy retired couple could pay no federal tax by putting their wealth into real estate, municipal bonds and stock index funds. The income earned from these investments was either tax-free or was cancelled out by deductions and exemptions. The article had a lot of fine points, but it was missing one very important piece. Most wealthy investors have considerable savings stashed away in tax-deferred retirement accounts such as traditional IRAs. The IRS won’t allow the money in these accounts to stay tax-deferred forever. The Tax Man cometh to retirees when Required Minimum Distributions (RMDs) begin, and he never leaves.
It’s difficult to find someone who thinks interest rates will go lower. However, you don’t have to dig far to see that the case for higher rates isn’t as certain as most people believe. I’m not saying interest rates will fall, but there’s certainly a case for that also.