BOSTON ( The Street Ratings) -- With 10-year Treasury yields near historic lows, it might be time for investors to get back into stocks. The current yield on the S&P 500 Index (2.05%) is hovering around that of 10-year government bonds. Historically, there has been a difference of a few hundred basis points.
Let's think about it in simple terms. Would you rather put $100 of your money into a (virtually) risk-free asset over the next 10 years and earn $2 a year, or would you rather purchase equity in a blue-chip company such as McDonald's or Coca-Cola or Nordstrom and earn the same $2 a year but also benefit from capital appreciation? Another metric, called the Fed Model (created by economist Ed Yardeni) says that stocks are extremely cheap. The model looks at the earnings yield (or earnings/price) for the S&P 500 Index and compares it to the 10-year Treasury. If the earnings yield for stocks is greater than the Treasury rate, then stocks are undervalued. The Fed Model states that "the bond and stock market are in equilibrium, and fairly valued, when the one-year forward-looking earnings yield equals the 10-year Treasury note yield." Today, the forward earnings yield for stocks exceeds the Treasury rate by roughly 7.5%, levels that we haven't seen since 2008. (See chart below.)