Everyone’s all bent out of shape about the inverted bond yield curve, but I’m much more intrigued by another inversion: The dividend yield on the S&P 500 (^GSPC) now exceeds the yield on the 30-year Treasury bond (^TYX).
Last time this happened? March 2009 when stocks were dirt cheap. Today the 30-year Treasury yields 1.91%, while the S&P yields 1.95%
Does that mean that stocks are begging to be bought today?
First of all, understand that this dividend/Treasury yield inversion means that stocks are very cheap relative to bonds. That might sound curious to many investors, who have seen the stock market climb ever higher over the past decade (the past 12 months’ stall not withstanding.)
But what you might be missing here is that the bond market has climbed even more over the past year. The TLT (TLT), a Treasury bond ETF, has risen a striking 25.9% since the fourth quarter of last year—pushing yields down to multi-decade lows—while stocks have declined 1.5%. That means bonds have outperformed stocks by more than 27 percentage points over the past nine months.
So are stocks are poised for a multi-year run?
I wish I knew.
Remember though that back in 2009 we were coming out of the depths of the Great Recession. Stocks were not only inexpensive relative to bonds, they were cheap historically. The S&P 500 had fallen from over 1570 in the fall of 2007 to below 700 in March of 2009, a drop of some 55%. If you had nerve and foresight, it was a no-brainer. Today however stocks are close to all-time highs.
In early May, Warren Buffett told CNBC that: “I think stocks are ridiculously cheap if you believe ... that 3% on the 30-year bonds makes sense...”
Hmm. Now that’s a curious statement. The “makes sense,” part I mean. I’m wondering if Buffett is referring to why Treasury yields are so low, or in other words why bond prices have rallied so much. To my mind, the reason why U.S. Treasuries have appreciated so dramatically recently is at least in part because of ultra-low and negative interest rates around the rest of the world making our bonds that much more attractive.
I’ve been concerned lately about negative rates creating unforeseen distortions in the capital markets. This could be one of them.
In any event, wondering if stock prices will go up smartly from here is only considering one half of the equation. The other possibility is that the bond market crashes, or at least declines decidedly, which would mean interest rates would spike from here.
That appears so unlikely right now that it just might happen.