The stock market rallied to new highs in mid-May, as investors
continued to ride the momentum from a
surprisingly good jobs report
that came out at the beginning of the month.
Investor sentiment has a great deal to do with how news is
interpreted, and even reported. Not only have stock market bulls
made the most of that recent jobs report, but they are now seizing
on anything that can be interpreted as good news as another excuse
to push stock prices higher. Unfortunately for more conservative
investors in savings accounts and other deposits, banks will not be
so quick to embrace this optimism by raising rates.
A widely reported indicator of stock market valuation
reached a 58-year high recently
. This indicator is the ratio of the earnings yield on stocks to
the yield on Treasury bonds, and it is a good proxy for a of couple
fundamentals that go into
Prices relative to underlying earnings.
Stock prices have gone up by a tremendous amount over the past
several decades, but that doesn't mean that stocks keep getting
more and more expensive. What matters from a fundamental
investing standpoint is how much prices go up relative to the
underlying earnings. So, everything else being equal, a stock
selling at $20 a share with $2 a share in earnings should look
the same to an investor as a stock selling at $40 a share with $4
a share in earnings. Both stocks would have a price-to-earnings
(P/E) ratio of 10, and the earnings yield is simply the inverse
of that P/E ratio.
The discounting value of interest rates.
By comparing the earnings yield on stocks to bond yields,
investors are acknowledging that interest rates discount the
value of future earnings. The higher interest rates are, the less
valuable future earnings appear. However, with interest rates as
low as they are now, future earnings are not discounted by much,
which makes stocks appear more valuable.
Because fundamental stock valuation is a function of prices,
earnings and interest rates, stocks can be hitting new highs and
still appear like a good value, as long as earnings have grown
and/or interest rates are low.
The sobering facts
While the stock market is quick to celebrate any sign of good
news these days, there are some more sobering facts about the
current economy -- chiefly the fact that unemployment remains
On the global front, it was recently announced that the European
Union has entered its sixth quarter of recession -- with France now
one of the countries in the union that is officially in
The economy's lingering problems are the reason why depositors
will have to wait a while longer for
higher rates on savings accounts
. The banking environment is closely linked to the grassroots of
the American economy, and until economic improvement becomes more
widespread reality than isolated stories, expect banks to keep
rates on savings accounts and other deposits as low as