Weekly Update

Have Stocks and Bonds Become Cheap Yet?

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Published October 6, 2023

This week we turn to Delta Research and their recent overview of the stock and bond markets after the sharp rise in interest rates and corresponding pullback in stocks.


From the July 2023 high, the S&P 500 is down by about 8%. From the all-time high of 4818.62 reached on January 3, 2022, the S&P 500 index is down almost 12% and the drawdown has persisted for 21 months.

The S&P 500 is trading just above its 200-day moving average. The small-cap Russell 2,000, Dow Jones Industrial Average and the equally weighted S&P 500 index are all well below their 200-day moving averages. Momentum investors like to buy when securities have passed up through a moving average and are trading higher. Value investors often buy when the security is below the moving average. Investors may be hesitant to buy the S&P 500 as there is a reasonable likelihood that it will follow other major indexes down through its 200-day moving average.

S&P 500 earnings:
• 2022: $218.09, actual
• 2023: $220.83, consensus expectation
• 2024: $247.49, consensus expectation
• 2025: $277.03, consensus expectation

On 2024 earnings, the S&P 500 is trading at a P/E of 17.1x. The 25-year average forward 12-month P/E ratio is 16.75x. Using just this metric, value shoppers may not be rushing to buy the market cap weighted S&P 500 index yet.

If we apply the 25-year average P/E multiple to 2024 earnings, the implied level of the S&P 500 index is 4145. If you pull the top 10 largest stocks out of the S&P 500, the remaining 490 stocks are trading at a multiple of 16.4x, below the historical average.


Guggenheim, a highly respected institutional bond investment company, believes bonds are as inexpensive as they were during the Great Financial Crisis (GFC). Many of Guggenheim’s bond funds are trading at about “87 cents on the dollar.” Below is a chart of the price of the investment grade corporate bond index ETF (AGG). The unprecedented Federal Reserve rate rise cycle has been extremely damaging to bond values over the past two and a half years.

IG Corporate Bond Index (AGG)

When interest rates rise, bond values decline. When the Federal reserve “pauses” rate hikes and when the Federal Reserve lowers interest rates, bonds do well. Below is a chart showing stock and bond performance since 1993 in Fed Tightening, Pausing and Easing cycles.

Stock and bond performance in rate cycle

The 30-day Fed Funds futures pricing data indicates it is unlikely the Fed will raise rates again and rate cuts will begin next June. If this proves to be the case, we are in the “pause” phase of the rate cycle on our way to the easing cycle. The chart below shows how bonds should react to a 1% rate rise versus a 1% rate fall.

Bond performance 1%/-1% rate rise/fall


Market Update

Higher interest rates slammed utility stocks Monday sending the group to their worst day (-5%) since the Covid selloff. Rising rates make the high utility dividends less attractive. The broad market held up ok though with a mixed session and a +0.1% move in the S&P 500. But the broad market tumbled -1.4% lower Tuesday as the 10-year Treasury yield ticked above 4.8%. Energy stocks followed a -5.6% drop in oil prices Wednesday to pressure that recently leading sector. More broadly, stocks bounced back a bit from Tuesday’s drop with the Nasdaq recouping +1.4% as the ADP employment report showed a tepid rise in private sector employment. Energy prices slumped again Thursday while the broad market traded flat ahead of Friday’s monthly jobs report. Stocks initially sold off on the surprisingly strong jobs numbers Friday. But investors ultimately watered down the strong report noting that the report contained several seasonal factors driving the strength, and, more importantly, only a modest uptick in wages. The upward pressure from wages is a key driver of inflation expectations thus interest rates. Once investors came to terms with that analysis of the report, stocks moved upward to close with a +1.2% gain on the day.

A volatile week saw fear rise to its highest level in over six months for stock investors. The Friday rebound helped the S&P 500 manage a +0.48% gain. The Nasdaq 100 (QQQ) rose +1.79% . Smallcap stocks reflected the rising interest rates with a -2.12% loss for the week.

Warm wishes and until next week.