The 14 Charts of Christmas

for any market there is really no statistical significance between valuation and 1 year return. However, over a 10-year period, valuation is the only measure that matters. Thus, we can’t use this as a market timing tool, but we do want to understand the environment we are in and whether there is a margin of safety or not.

He pointed out that the Quantity Theory of Money showed us there is another critical measure to consider - velocity of money. IN practice, we can only observe this after the fact, but as a gauge of the propensity for companies and business to demand the use of money, there are many things we can watch - mortgages, auto loans, credit card usage etc.

For this relative valuation, I use the Yardeni Model, which is a variation of the Fed model. The latter compares equities and Treasuries. The Yardeni Model compares equity and credit or the two beta markets that allocators may choose between. It uses the S&P 500 earnings yields and the Moody’s Baa corporate rate.