Back in the beginning of the year, there were some who thought it was time for Byron Wien, the

Morgan Stanley

chief investment strategist, to get

out of the business.

"It was a dark period for me," he says. "People were telling me to retire. People were saying the market has gone beyond you. This is a new era and old guys don't get it."

The problem was that Wien's way of valuing the market looked like it had fallen hopelessly out of whack. His model looks at the relationship between the 10-year Treasury's yield and the earnings yield (that is, earnings divided by price) of the

S&P 500

. In simple terms, when the S&P's earnings yield drops below the yield of the 10-year Treasury -- which, unlike the stock market, has a nearly guaranteed rate of return -- it's time to watch out. And this was more than just theoretical. Up until last year, it seemed like the model was working.

Guys, It's Working

"Every time the market got 20% overvalued, it was a dangerous period," says Wien. "It got 40% overvalued in 1987. It got 20% overvalued in 1990. It got 20% overvalued in 1997 and 1998. In 1999, it went all the way to 50% overvalued. That's when the model sort of got discredited."

But it sure hasn't stayed discredited. With hindsight, we can say that when the model indicated the S&P was 50% overvalued, it was showing how positively euphoric the market had become. And its suggestion that Treasuries would outperform the market going forward ended up being spot on. In 2000, the S&P has lost 8%, while Treasuries have returned about 9%.

What Next?
S&P 500, this year

Now as Treasuries rallied, their yields came down. And as the S&P declined, even as earnings at its component companies grew, its earnings yield went up. And suddenly, the S&P doesn't seem so outrageously expensive anymore. By Wien's reckoning, it's only about 6% rich. By the reckoning of

J.P. Morgan

equity strategist Doug Cliggott, who uses a similar model and was similarly maligned early in the year, it's actually a few percent cheap.

That doesn't mean that Cliggott is ready to issue the all-clear on stocks -- he worries that earnings could be challenging next year, and is keeping a 2001 price target of 1400 on the S&P, which closed Tuesday at 1347.

"The way I'm talking about it in client meetings is that the risk-return profile is a lot more attractive today than it was nine months ago," he says. "Is it good enough so stocks will outperform Treasuries in the next six to nine months? I don't know."

Getting Rich Quick

One reason Treasuries could continue to outperform now is that so many investors, both institutional and individual, are still very much all-stocks-all-the-time. "There are probably a lot of people who have a total asset portfolio that is still skewed violently to equities," says Cliggott. "When people are making their new allocations for the new year, bonds and cash might be a little more prominent."

But even if it isn't the perfect buying opportunity right now, it might not be a bad one. Stocks have come back in line with their historic valuations relative to Treasuries, and although there are worries on the earnings front, there's a good chance that there will be even lower bond yields to mitigate that.

"I don't think that anyone knows what fair valuation for the S&P is -- it implies some sort of central office that knows these things," says

Salomon Smith Barney

strategist John Manley. "But it's damn seldom that the market goes down and stays down when Treasury yields and other bond yields are down."

Yet even if the market does find its footing here, Wien cautions that investors shouldn't expect things to go back to the way they were.

"The most important thing that the model may be saying, and I happen to believe this, is that this has been a transition year," he says. "It hasn't been a disaster, it hasn't been a bear market, but it's been a year with a negative return. Most people would like to think we're going back to 20% years. We're not. The five years of 20% returns were a gift from God."