Valuation matters

Valuation matters, at least it has always in the past. According to the work of Yale professor Shiller, there is indeed a strong correlation between the attractiveness of equities relative to bonds and their subsequent 10 year return. The attractiveness of equities is measured here by normalised 10 year earnings yield minus the 10 year bond yield. Currently this figure stans at a meager 1.9%, meaning equities are as unattractive as during the Internet bubble. Time to revisit bonds and be very selective in equities to chase for lowly valued quality businesses.