By almost any measure, credit markets have recovered most of the losses caused by September’s collapse of Lehman Brothers Holdings Inc. Not U.S. stocks.
The Standard & Poor’s 500 Index, while up 31 percent from its lows, must rise 41 percent to reach its last closing price before Sept. 15, when Lehman filed for the biggest bankruptcy in history, freezing financial markets. Since then, 10-year Treasury notes have climbed 4.6 percent and investment-grade company bonds, which plunged as much as 14 percent, are now down 1.2 percent, according to Merrill Lynch & Co. bond indexes.
The disparity shows that while the U.S. government succeeded in calming markets, stock investors aren’t convinced that the economy and profits will grow fast enough to sustain a bigger advance. Investors are paying the lowest prices on record for equities compared with corporate bonds, based on the earnings yield on the S&P 500.
“Equity investors are still scarred,” said James Dunigan, chief investment officer at PNC Financial Services Group Inc.’s wealth-management unit, which oversees $96 billion in Philadelphia. “Those scars aren’t as easy to heal as they are in the fixed-income market.”
Earnings yield, calculated by dividing the total profit of companies in the S&P 500 by the index’s price, equaled 8.2 percent last week, based on analysts’ earnings estimates for next year. That exceeded yields on U.S. investment-grade bonds by 1.36 percentage points, the widest margin on record when compared with historic profits, monthly data compiled by Bloomberg and Merrill Lynch show.
Stocks Versus Bonds
A stock that pays more in earnings than corporate bonds yield in interest is judged to be cheap by some investors who view profits as the main gauge of returns in equities. Comparing earnings yields to bond payments is a valuation technique used by Warren Buffett, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. and the world’s most successful investor.
Stocks have become even cheaper than debt during the S&P 500’s two-month rebound as corporate bond yields fell by 1.5 percentage points. The gap has widened 0.15 percentage point since the start of March, data compiled by Bloomberg and New York-based Merrill show.
The S&P 500 also trades below its average price-earnings ratio of 16.3 over the past 128 years, the period tracked by Yale University professor Robert Shiller. Based on analysts’ estimates for combined earnings of $72.59 per share for S&P 500 companies next year, the measure would have to increase 33 percent to 1,183.22 to match the historic valuation, according to share-weighted data compiled by Bloomberg.
Lehman, Libor
Unraveling credit markets sparked by the collapse of bonds tied to subprime mortgages triggered bank losses that have grown to almost $1.5 trillion, causing the economy to contract by more than 6 percent in each of the last two quarters, the most since 1958, Bloomberg data show. The recession deepened when New York- based Lehman, then the fourth-biggest securities firm, filed for bankruptcy.
Banks hoarded cash on concern more lenders would fail, causing the London interbank offered rate that banks charge each other for overnight loans to more than triple in a month, while the interest for 3-month loans jumped 71 percent. The difference between Libor and the Federal Reserve’s target rate for overnight lending among financial institutions climbed to 3.32 percent on Oct. 10, the highest since at least 1984.
Investment-grade U.S. corporate debt fell 6.8 percent last year, high-yield bonds lost 26 percent and the S&P 500 plunged 37 percent, including dividends. Ten-year Treasuries returned 20 percent. Securities rated below BBB- by S&P or Baa3 by Moody’s Investors Service are considered below investment grade.
The Standard & Poor’s 500 Index, while up 31 percent from its lows, must rise 41 percent to reach its last closing price before Sept. 15, when Lehman filed for the biggest bankruptcy in history, freezing financial markets. Since then, 10-year Treasury notes have climbed 4.6 percent and investment-grade company bonds, which plunged as much as 14 percent, are now down 1.2 percent, according to Merrill Lynch & Co. bond indexes.
The disparity shows that while the U.S. government succeeded in calming markets, stock investors aren’t convinced that the economy and profits will grow fast enough to sustain a bigger advance. Investors are paying the lowest prices on record for equities compared with corporate bonds, based on the earnings yield on the S&P 500.
“Equity investors are still scarred,” said James Dunigan, chief investment officer at PNC Financial Services Group Inc.’s wealth-management unit, which oversees $96 billion in Philadelphia. “Those scars aren’t as easy to heal as they are in the fixed-income market.”
Earnings yield, calculated by dividing the total profit of companies in the S&P 500 by the index’s price, equaled 8.2 percent last week, based on analysts’ earnings estimates for next year. That exceeded yields on U.S. investment-grade bonds by 1.36 percentage points, the widest margin on record when compared with historic profits, monthly data compiled by Bloomberg and Merrill Lynch show.
Stocks Versus Bonds
A stock that pays more in earnings than corporate bonds yield in interest is judged to be cheap by some investors who view profits as the main gauge of returns in equities. Comparing earnings yields to bond payments is a valuation technique used by Warren Buffett, the chairman and chief executive officer of Omaha, Nebraska-based Berkshire Hathaway Inc. and the world’s most successful investor.
Stocks have become even cheaper than debt during the S&P 500’s two-month rebound as corporate bond yields fell by 1.5 percentage points. The gap has widened 0.15 percentage point since the start of March, data compiled by Bloomberg and New York-based Merrill show.
The S&P 500 also trades below its average price-earnings ratio of 16.3 over the past 128 years, the period tracked by Yale University professor Robert Shiller. Based on analysts’ estimates for combined earnings of $72.59 per share for S&P 500 companies next year, the measure would have to increase 33 percent to 1,183.22 to match the historic valuation, according to share-weighted data compiled by Bloomberg.
Lehman, Libor
Unraveling credit markets sparked by the collapse of bonds tied to subprime mortgages triggered bank losses that have grown to almost $1.5 trillion, causing the economy to contract by more than 6 percent in each of the last two quarters, the most since 1958, Bloomberg data show. The recession deepened when New York- based Lehman, then the fourth-biggest securities firm, filed for bankruptcy.
Banks hoarded cash on concern more lenders would fail, causing the London interbank offered rate that banks charge each other for overnight loans to more than triple in a month, while the interest for 3-month loans jumped 71 percent. The difference between Libor and the Federal Reserve’s target rate for overnight lending among financial institutions climbed to 3.32 percent on Oct. 10, the highest since at least 1984.
Investment-grade U.S. corporate debt fell 6.8 percent last year, high-yield bonds lost 26 percent and the S&P 500 plunged 37 percent, including dividends. Ten-year Treasuries returned 20 percent. Securities rated below BBB- by S&P or Baa3 by Moody’s Investors Service are considered below investment grade.
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