Stocks & Bonds -- In Synch ~ Steve Blitz Morning Notes
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Friday, October 9, 2009

Stocks & Bonds -- In Synch

In the past several years there have been some divergent valuations between the credit and equity markets, with the equity market tending towards the more optimistic. The chart below compares the P/E ratio of the S&P500 Industrial sector to the option adjusted spread (OAS) of the Merrill Lynch BBB Coporate Index. This chart of daily data covers the period from Jan 2002 up until yesterday. The data points for the past month are in red.

If there is undue optimism in the market it is shared by bond and equity investors. The P/E ratios travelling between 14 and 16 line up on the marginally conservative side relative to OAS levels just over 300 basis point -- but keep with the general trend of lower OAS translating into higher P/E ratios. In sum, the credit and equity markets are cautiously optimistic over future earnings and the ability to pay off debt. This isn't to say they are right, only to say that there is a reasonable consensus.

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