Inflation May Stop Rate Cuts From Lifting P/Es: Chart of the Day

Possible interest-rate cuts worldwide may fail to lift stocks to higher multiples of earnings, according to Pierre Lapointe, Brockhouse & Cooper Inc.’s chief global strategist.

“Multiples are usually very depressed” when rates are negative after adjusting for inflation, Lapointe and financial economist Alex Bellefleur wrote yesterday in a report. The so-called real yields for 10-year government bonds are less than zero in the U.S. and elsewhere.

The CHART OF THE DAY compares the inflation-adjusted yield on 10-year Treasury notes with the price-earnings ratio for the Standard & Poor’s 500 Index since 2002. The real yield dropped below zero in May, and the ratio has dropped to 13.7 times earnings from 15.3 times since then.

U.S. stocks have averaged 11.6 times earnings when real rates have been negative during the past 140 years, the report said. That’s well below the 17.5 times at rates of 2 percent to 3 percent, as calculated from data compiled by Yale University Professor Robert Shiller.

Only four of 31 countries -- Brazil, Hungary, Mexico and Turkey -- have real yields high enough to indicate that easing credit would lift P/E ratios, according to Brockhouse. Central banks in Brazil and Turkey have cut rates since August.

“In several countries, if the already low yields were to fall even more, it could lead to a contraction of multiples,” wrote Lapointe, who is based in Montreal. Fourteen countries besides the U.S. have 10-year yields that are lower than the rate of increase in consumer prices, according to the report. China, India and South Korea are among them.

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