August 01, 2018 - quick project at work

I'm in the office and had a couple of hours to kill today - have been thinking about current state of the market and wanted to get my head around this clearly.

Took a look at following over the last ~50 years, out of curiosity, to form some sort of first-hand view (in addition to synthesizing existing material in books and in magazines). Note these are all charts up to July, 2018, from FRED.

1. Unemployment rate (wage growth i didn't see much info) 
2. Inflation 
3. Fed rate
4. Yield on 10yr t-bonds 
5. Shiller PE and earnings yield 
6. Real GDP growth 

Market doesn't seem like the 2000/01 bubble, but is expensive on PE - more so than in 2007 before the mortgage crisis and than in 2011/12 before the Greek debt crisis... 

Inflation seems to lag unemployment. So if unemployment decreases (employment increases), inflation increases. On that basis, we should see some upward movement in inflation in 2019/20... 

I also assume increased inflation (or vice versa - chicken egg?) will lead to wage growth. Unless inflation is very high and then real wage growth can be low (since interest rates will be high and slow growth)     

Fed rate is gradually being increased, in order to counter expected rise in inflation stemming from increasing employment rate, fiscal stimulus produced by tax reform, and 3 QE's earlier in this decade... 

Also seems like in times of high inflation, capital flows to bonds which may be considered an inflation hedge (like TIPS)... so it is also fair to say that increasing interest rates imply increases in discount rates since all discount rates are based on risk-free which is 10Y bonds...  

Again confirming that 10Y yields move in line with Fed rates... 

Since discount rates dictate returns, which is classical finance theory, we see that earnings yields (or inverse Shiller PE in this case) move in line with T-bonds. Which is to say that higher the yield, lower the market PE (S&P500 in this example). So as, in today's environment, we see bond yields rise, we may expect PE re-rating downwards.. 

As a side note, i wanted to see if there is meaningful correlation between unemployment and real growth - seems like there is some - i want to leave this to another time for now...