Market Valuation Measures: Does the Fed Model Really Work?

by Stephen E. Wilcox

Has the steep market decline finally produced a significant undervaluation of stock prices?

Some market commentators in the media would have us believe so, based on evidence from the “Fed Model.”

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The Fed Model is a measure that is often used to judge the relative attractiveness of stocks compared to other asset categories. This approach compares the yield on 10-year Treasury bonds to the earnings yield on the S&P 500: Stocks become more attractive as earnings yields rise above those on 10-year Treasury bonds.

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