When it comes to today’s market… interest rates are what matter.
Heck, they’re practically the only thing that matters, as I explained yesterday here in DailyWealth.
In that piece, I showed why today’s low interest rates are creating incredible value in the housing market. Today, I’ll focus on stocks.
The fact is that this interest-rate story is creating big value for stocks, too. It’s happening despite the rally we’ve already seen since March. And that’s not the only reason to get excited.
Let me explain…
Think about it: You earn about 0% with your money in the bank. But stocks at a price-to-earnings (P/E) ratio of 20 (20-to-1) have an “earnings yield” (E/P) ratio of 5% (that’s 1-to-20).
When you buy a stock at a P/E of 20, you are buying an earnings yield of 5%. Compare that to earning 0% in the bank… or 0.6% on a 10-year bond.
So as you can see, the earnings yield is a way to measure value while keeping interest rates in mind. And it shows that stocks are a great value right now.
Even if stocks doubled in price to a P/E of 40, then their earnings yield would be 2.5% – which is still pretty good relative to other investments these days.
Again, if you’ve been reading DailyWealth recently, you already know this. But there’s even more to the story.
Regular readers know I like to buy what’s cheap, hated, and in an uptrend…
The earnings yield shows us that stocks are not expensive, thanks to interest rates. You can also see that stocks are in an uptrend – you don’t need any fancy charts from me to know that.
But are stocks hated?
You’ve probably noticed that investors are talking more about the stock market this year. The ups and downs have gotten people’s attention. And heck, there are no sporting events to bet on… Might as well bet on stocks, right?
It might feel like more people are buying in, which is an essential part of a Melt Up in stocks. But the data tells me that we are simply not there yet.
A Melt Up is the last big push of a major stock boom, where you tend to see the biggest gains. Stocks are loved in the later stages of a Melt Up… Investors start buying up stocks and stock funds to a crazy degree.
But that isn’t happening yet.
This simple chart sums it up. Since 2017, investors have been consistently pulling money out of American stock funds (exchange-traded and mutual funds). And they have been consistently putting money into bond funds (which pay next to nothing!).
Take a look. More than $800 billion has flowed into bond funds since 2017…
So is this a sign of the end? With the huge rise in stock prices this year, did you miss it?
No, and no.
There’s plenty of upside ahead. So be bold, and take advantage of it!
Most other folks are too hung up on the new highs in stock prices. They’re not willing to accept that stocks are a good deal relative to bonds or money in the bank. But they are a good deal today – thanks to record-low interest rates. And as the chart above shows, they’re hated, too.
I hope that you are bold enough to see these new highs for what they are. New highs in price mean nothing… What truly matters is what you get for your money – which is a lot today.
Yes, we are at new highs in stocks. And yes – significantly higher prices are ahead.
Good investing,
— Steve
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Source: Daily Wealth