The VFS Discount Index analyzes the ongoing pricing variance between the stock market and the fixed income market, and attempts to predict which market will perform better over the next 60 days. This index analyzes the valuations in the stock market, the current level of interest rates the slope of the yield curve, and other technical factors. Based on these factors, the index is calculated to determine if one of the markets is a better value than the other based on historical market data.

For calculating stock market valuation, the model uses the Puget Investor future earnings estimates of of the stocks listed on Puget Investor. Therefor, it is not a pure measure of the market valuation as a whole, only a measure of the valuation in that basket of stocks.

Current bond market valuation is based on current US Treasury bond market prices and yields.

The assumption this model makes is as interest rates rise, the stock market is less attractive to investors, and as interest rates fall, it becomes more worthwhile for investors to take the risk in the stock market. This is not a linear process, based an many factors, such as momentum, investor psychology, corporate earnings estimate, and imperfections in moves by the Federal Reserve Board.

This model does not attempt to predict whether or not the stock or bond market will rise or fall. It only attempts to predict whether or not one market will outperform the other. For example, if the model predicts the stock market is undervalued, thay may just be predicting the stock market will lose less money relative to the bond market in the next 60 days.

This model uses a proprietary calculation. However, if you have additonal questions as to factors or assumptions made in the calculation, please Contact Us.