Contributing to the stock market’s agita so far this year has been the prospect that the 10-year US Treasury bond yield may be on the verge of rising above 3.00%, a level that for some reason is perceived as particularly dangerous for stocks. I suppose that’s mostly because a few widely respected market gurus have been warning that the risks of a bear market in stocks increase above this totally subjective threshold level. Perversely, at the same time, there has been some consternation over the fact that the yield curve has been flattening. That implies that the bond yield hasn’t increased fast enough relative to the federal funds rate and relative to the two-year Treasury note yield! So what are we supposed to be rooting for?
Complicating matters some more are that as the Fed has hiked the federal funds rate, short-term Treasury bill and note yields have risen to match or even exceed the S&P 500’s dividend yield. A few market commentators deem this development as bear-market provoking. So we have nothing to fear but that interest rates will continue to rise above the dividend yield and that short-term rates will rise faster than long-term rates. Consider the following:
(1) S&P 500 yields. I like to look at the S&P 500 dividend yield along with the S&P 500 earnings yield. The latter is derived from the former. On average over time, half of earnings tends to be paid out as dividends. During Q1-2018, the dividend yield was 1.89%, while the earnings yield during Q4-2017 was 4.78% (for the latter, Q1 data aren’t yet available).
(2) Treasury bill rates. The one-year US Treasury note yield rose to 2.06% during March and above the S&P 500 dividend yield for the first time since June 2008. I am hard pressed to see a predictable pattern showing that the spread between the one-year and the dividend yield can be useful in calling bear markets. They tend to occur when interest rates rise high enough to cause a recession. Simply crossing above the dividend yield isn’t a sure-fire signal of an impending recession and bear market.
(3) Treasury bond yields. Comparing the 10-year Treasury bond yield to the dividend yield makes even less sense as a bear market indicator. This Treasury yield is usually compared to the earnings yield, since the total return of stocks tends to be driven by overall earnings. Whether it makes sense for investors to compare just the dividend yield to the bond yield is a debatable issue.
Complicating matters some more are that as the Fed has hiked the federal funds rate, short-term Treasury bill and note yields have risen to match or even exceed the S&P 500’s dividend yield. A few market commentators deem this development as bear-market provoking. So we have nothing to fear but that interest rates will continue to rise above the dividend yield and that short-term rates will rise faster than long-term rates. Consider the following:
(1) S&P 500 yields. I like to look at the S&P 500 dividend yield along with the S&P 500 earnings yield. The latter is derived from the former. On average over time, half of earnings tends to be paid out as dividends. During Q1-2018, the dividend yield was 1.89%, while the earnings yield during Q4-2017 was 4.78% (for the latter, Q1 data aren’t yet available).
(2) Treasury bill rates. The one-year US Treasury note yield rose to 2.06% during March and above the S&P 500 dividend yield for the first time since June 2008. I am hard pressed to see a predictable pattern showing that the spread between the one-year and the dividend yield can be useful in calling bear markets. They tend to occur when interest rates rise high enough to cause a recession. Simply crossing above the dividend yield isn’t a sure-fire signal of an impending recession and bear market.
(3) Treasury bond yields. Comparing the 10-year Treasury bond yield to the dividend yield makes even less sense as a bear market indicator. This Treasury yield is usually compared to the earnings yield, since the total return of stocks tends to be driven by overall earnings. Whether it makes sense for investors to compare just the dividend yield to the bond yield is a debatable issue.
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