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The Fed Model
ASSET ALLOCATION STRATEGY
The "Fed model" is a theory of equity valuation used that hypothesizes a relationship between long-term treasury notes and the expected return on equities.
If the S&P earnings yield is higher than the treasury yield, investors should sell treasuries and buy stocks (i.e. stocks are undervalued), while if the S&P earnings yield is lower investors should sell stocks and buy the more attractive treasuries (i.e. stocks are overvalued).
See Also
Dr. Edward Yardeni. StockValuationModel. Equity Research, Prudential Financial. August 9, 2002.
2.Bekaert and Engstrom. Inflation and the Stock Market: Understanding the 'Fed Model'. 2008