Arezi Ratio for Jan 30

*                         1/9      1/16     1/23     1/30/23
S&P 500 Index             3895.08  3999.09  3972.61  4070.56
Trailing 12 month PE      21.51    22.14    21.98    23.04
Trail Earnings yield      4.65%    4.52%    4.55%    4.34%
Forward 12 month PE       19.08    19.62    19.47    20.12   
Fwd Earnings Yield        5.24%    5.10%    5.14%    4.97%
90 day tbill yield        4.67     4.67     4.72     4.73
10 year tbond yield       3.55%    3.49%    3.48%    3.52%
Arezi Ratio               1.00     1.03     1.04     1.09
Fed Ratio                 0.68     0.68     0.68     0.71

The Arezi Ratio is the 90 day tbill yield divided by the trailing
earnings yield of the S&P500. A low ratio means that stocks are undervalued.

The “Fed Ratio” is the 10 year treasury bond yield divided by the
forward estimated operating earnings yield of the S&P500. A low ratio
means that stocks are undervalued. Thus, a ratio of 0.71 for example
means, according to Yardeni, that stocks are cheaper than “fair value”
by 29%.

The ‘S=120-50*Arezi Ratio’ formula indicates an allocation of 66%
stocks, 34% cash this week.

Other timing indicators:
The S&P index is above its 200DMA. - Bullish
We are in the Nov-Apr part of the year. - Bullish
The trailing PE ratio of the S&P is above 17. - Bearish
The treasury yield curve is inverted. - Bearish

A composite allocation may start with the Arezi formula and subtract 10%
for each bearish indicator. The current target allocation is 46%.

An alternative allocation, using S=120-30*Arezi Ratio and the first
two of the other timing indicators, produces a target of 87%.

Elan

11 Likes

According to Factset, consensus 2023 earnings estimate for the S&P 500 is $233. The index closed Friday at $4071, implying a forward P/E of 17.5

If you prefer Yardeni, they estimate it at $225, but that still works out to a forward P/E of 18.1 (not 20.1 as you are showing). The fwd earnings yield would therefore be 5.5%.

An 87% recommended allocation is quite a difference from the 46% one. Have you run a backtest with these recommended allocation percentages to see if the result beat buying and holding the index?

3 Likes

I use the S&P estimated earnings spreadsheet. If you go here -

You’ll see below the chart a drop down menu called Additional Info. Scroll down that menu a bit to Index Earnings, which will download the spreadsheet. The spreadsheet is usually updated once a week. Scroll down in it to row 128 roughly and look at the column for AS REPORTED EARNINGS PER SHARE. That’s what I use, and I prorate the estimates based on the number of days we are into the current quarter.

Elan

4 Likes