Can anyone bullet point the basics? Schweser only mentions it very briefly.
Fed model asserts that : the stock market is overvalued if the market’s current earnings yield (earnings/price) is less than the 10-year Treasury bond yield. The fed model indicates that when the yield on T-bonds is greater than the earnings yield of stocks ( the higher risk investment) that stocks are overvalued. CFAI volume 3 page 37
Rationale: stocks are the risker investment; therefore yield should be higher than T-bonds to compensate
Move your money to whichever is yielding higer.
i took the year off so I’m not in the middle of L3 studying, but isn’t this a little myopic of a rule? Does anyone lend credence to this in practice?
A lot of following on Wall Street for this BS. Google “Fight the Fed Model” to see how stupid this idea is.