There continues to be some inefficiencies in the market as a result of the rapid increase in rates that have not been fully assimilated by the economy. As you can see in the chart below, 6 month bills are yielding more than the earnings yield of the S&P500. In other words, if we were to consider the equity index as a bond with extremely long duration, it would be yielding less than the short terms T-bills. As you can see as well, over the last 23 years, this has never happened, and it shouldn’t happen. It is an extreme measure. It means that the equity market is very expensive not only in terms of its history, but also compared to other asset classes. They way it typically gets resolved is through a correction on the equity market that forces the intervention of the Fed by lowering rates, and that makes both lines to separate again. However, the Fed has indicated that rates will be higher for longer, ceteris paribus. How much and how abrupt needs to be the correction on the equity index to force the Fed to change its mind?
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