A quick look at a timely topic of interest - with a brief review of why it could matter to investors.

Chart of the Week

July 6, 2015

Stocks AND bonds—that is the question
S&P 500 earnings yield and Moody's BAA corporate bond yield¹


Source: Bloomberg and S&P Dow Jones, as of 6/29/2015. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • With both stocks and bonds seeing substantial appreciation in recent years, it's more of a challenge to find opportunities to capture unrealized value.
  • By historical standards, stock valuations are somewhat elevated and bond yields remain low.
  • But from a current valuation standpoint, stocks and corporate bonds look similar on a yield basis, with the S&P 500 earnings yield (inverse P/E) at 5.38% and the Moody's BAA corporate bond yield at 5.17%.
  • In addition, both sectors are likely to be impacted by the gradual rise in interest rates that many expect to begin later this year.
  • Investors' best response to such an environment might be gradual as well.
  • Valuations may not suggest a reason to reconsider existing allocations; which is just as well, given that most investor portfolios are built around long-term assumptions and goals in the first place.
  • But they could play into the strengths of active managers that are adept at realizing valuation differences at the individual security level, whether it be in stocks or bonds.
  • Another potential positive: the prospect of a gradually changing interest rate environment could present choices for active managers in both asset classes – orderly reinvestment into higher yielding bonds as rates move up—and into new equity positions as future corporate prospects evolve.

The chart:

  • The chart shows the S&P 500 earnings yield (inverse P/E) and the Moody's BAA corporate bond yield from June 30, 2005 – June 29, 2015.
  • As of June 17, 2015, the S&P earnings yield was 5.38% and the Moody's BAA corporate bond yield was 5.17%.
  • For roughly five years, the S&P 500 earnings yield has exceeded the BAA bond yield, at times by a significant margin, but those yields have converged recently.
  • The wide gap that opened up five years ago was a function of S&P 500 earnings rising faster than the price of the index while bond yields declined. As the price of the S&P 500 began to rise—and as earnings growth slowed in recent quarters—the S&P 500 earnings yield has come down.
  • Meanwhile, the recent rise in market interest rates—note the rise in the BAA corporate yield over the past three months—has helped close the gap even further.

¹ The S&P 500 earnings yield for June 2015 is based on expected earnings of $110.66 for 2Q15 and S&P 500 price of 2,057.64 on 6/29/15. The Moody's BAA corporate yield is as of 6/29/15.


The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges.

The earnings yield is the earnings per share for the most recent 12-month period divided by the current market price per share.

The price-to-earnings (P/E) ratio is a stock's price divided by its earnings per share.

Moody's Investors Service is a leading provider of credit ratings, research, and risk analysis

BAA is a credit rating denoting a medium grade, moderate risk security.


The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

Common stocks generally provide an opportunity for more capital appreciation than fixed-income investments but are subject to greater market fluctuations.

Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Yields represent past performance and there is no guarantee they will continue to be paid.

This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. All investments involve risk, including possible loss of principal. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland:
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.


Previous Editions

Click on a date to view that week's edition of charts.


When will the Fed raise the Fed Funds target rate?


When will the Fed raise the Fed Funds target rate?

Not until 2016

Previous month Poll

Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
No - Deflation is already taking hold, making monetary policy changes ineffective
Yes - The US model shows that monetary easing can help economies heal in the medium term
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact