When it comes to today's market... interest rates are what matter.
Heck, they're practically the only thing that matters, as I explained yesterday here in DailyWealth.
In that piece, I showed why today's low interest rates are creating incredible value in the housing market. Today, I'll focus on stocks.
The fact is that this interest-rate story is creating big value for stocks, too. It's happening despite the rally we've already seen since March. And that's not the only reason to get excited.
Let me explain...
The interest-rate story is what makes real estate cheaper than you can imagine... And the same is true for the stock market.
Think about it: You earn about 0% with your money in the bank. But stocks at a price-to-earnings (P/E) ratio of 20 (20-to-1) have an "earnings yield" (E/P) ratio of 5% (that's 1-to-20).
When you buy a stock at a P/E of 20, you are buying an earnings yield of 5%. Compare that to earning 0% in the bank... or 0.6% on a 10-year bond.
So as you can see, the earnings yield is a way to measure value while keeping interest rates in mind. And it shows that stocks are a great value right now.
Even if stocks doubled in price to a P/E of 40, then their earnings yield would be 2.5% – which is still pretty good relative to other investments these days.
Again, if you've been reading DailyWealth recently, you already know this. But there's even more to the story.
Regular readers know I like to buy what's cheap, hated, and in an uptrend...
The earnings yield shows us that stocks are not expensive, thanks to interest rates. You can also see that stocks are in an uptrend – you don't need any fancy charts from me to know that.
But are stocks hated?
You've probably noticed that investors are talking more about the stock market this year. The ups and downs have gotten people's attention. And heck, there are no sporting events to bet on... Might as well bet on stocks, right?
It might feel like more people are buying in, which is an essential part of a Melt Up in stocks. But the data tells me that we are simply not there yet.
A Melt Up is the last big push of a major stock boom, where you tend to see the biggest gains. Stocks are loved in the later stages of a Melt Up... Investors start buying up stocks and stock funds to a crazy degree.
But that isn't happening yet.
This simple chart sums it up. Since 2017, investors have been consistently pulling money out of American stock funds (exchange-traded and mutual funds). And they have been consistently putting money into bond funds (which pay next to nothing!).
Take a look. More than $800 billion has flowed into bond funds since 2017...
So is this a sign of the end? With the huge rise in stock prices this year, did you miss it?
No, and no.
There's plenty of upside ahead. So be bold, and take advantage of it!
Most other folks are too hung up on the new highs in stock prices. They're not willing to accept that stocks are a good deal relative to bonds or money in the bank. But they are a good deal today – thanks to record-low interest rates. And as the chart above shows, they're hated, too.
I hope that you are bold enough to see these new highs for what they are. New highs in price mean nothing... What truly matters is what you get for your money – which is a lot today.
Yes, we are at new highs in stocks. And yes – significantly higher prices are ahead.
Good investing,
Steve
Further Reading
Interest rates are likely to stay low for the foreseeable future. And it's setting the stage for another great asset boom... one that could drive stocks to incredible heights. To learn more, check out Steve's two-part series here and here.
"The virus took the market by surprise," Steve writes. "Now, the market is looking forward." Plus, a signal with a powerful track record is giving us the green light today... If you're worried about the strength of the recent rally, read more here.
This company has the resources to provide the same lightning-fast service as Amazon, the e-commerce king. And it's already doing it in North America...
THIS ECONOMIC BELLWETHER IS HITTING NEW HIGHS TODAY
Today's chart shows us that the economy is getting back on track...
It seems like everyone has a different opinion about the effects of the COVID-19 pandemic and related lockdowns. Here in DailyWealth, we use different companies as real-world economic bellwethers. They tell us whether goods and services are in demand, and whether people and businesses have the money to pay for them. And this transport company paints a promising picture...
Canadian Pacific Railway (CP) is a $40 billion freight company with 12,500 miles of railroad across Canada and the United States. Its trains handle cargo like grain, coal, timber, and oil, along with finished products like automobiles. The coronavirus hit some of these businesses, but CP's sales were still $1.3 billion in the most recent quarter – a decline of just 9% year over year. The company also now expects earnings growth in 2020.
CP shares sold off earlier this year on fears that COVID-19 would destroy the economy. But the stock is already up about 60% since its March lows and just hit a new all-time high. This bellwether tells us that even if a few sectors continue to struggle, the overall economy is doing well today...
