However, August did see some interesting movement in a couple of the indicators. The yield curve measure moved down as ten year rates have continued to come in. Corporate spreads also narrowed in August, suggesting looser credit conditions for corporations, which is bearish for the model due to the contrarian intention of the indicator. The overall model remains very bullish because the earnings yield metric is at levels similar to the early 1950s as well as the bottom in 1974, which is immensely bullish for stocks.
Still, this model was based on historical patterns and a deflationary environment would ruin some well established historical relationships on which investors have relied. Principally, in our discussions of PE ratios we talked about how PE ratios work because there is the implicit assumption that earnings in the future will be higher. In a deflationary environment this isn't the case. As such, keep your eyes peeled. I still think that stocks are quite cheap on a historical basis relative to alternative investments, but it isn't as unqualified as the indicators in the model would suggest.