A Top Bond Strategist Looks at Stocks and Recoils

I am solely a U.S. interest rate strategist, so it is with no shortage of anxiety that I dare delve into the equity market, which hit new highs again today. I’m typically bullish on bonds and bearish on stocks, so what follows panders to a career bias. With that out of the way, I do look at the evidence, and there are things out there that make me wary of equity valuations which, all things being equal, should serve as a brake of sorts on a sharp rise in bond yields.

The equity gurus cite various broad perspectives such as price-to-earnings ratios on the S&P 500, both trailing and forward-looking, and variations on that theme. I like to look at the offbeat, noting that it might raise fewer challenges to my analysis. Take the actual cost of a share of the S&P 500 in terms of what it would take an ‘average’ American to buy it.

Using average hourly earnings, one would have to work 108.3 hours to buy a share of the S&P 500. That is only slightly above the March 2000 peak of 107.8 hours and well above the peak prior to the last recession of 89.8 hours. A market technician looking at a chart of this might express caution about a double top forming, meaning that a pattern is about to reverse. So at least by this measure, it’s fair to argue that stocks cost a lot of money to the average American, which is probably one of the reasons many Americans don’t actually own stocks. A recent Gallup Poll puts the figure at 52 percent, the lowest level in Gallup’s 19-year trend.