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The short-term results are not convincing, while the longer-term returns are outperforming

For the longest, bond yields were higher than stock yields, and that was accepted as the natural order of things. Shares offer the opportunity for higher returns through appreciation of the share price. A disadvantage was presumably a reduced income stream, which however changed after the financial crisis. Since then, we’ve seen extremely low interest rates, which are typically below stock returns.

The chart below compares the yield on the 10-year Treasury note with the dividend yield of the S&P 500 Index (SPX). In mid-2020, the yield on the Treasury note hit its lowest level ever. The uptrend has accelerated lately and is back above the dividend yield on stocks. As bond yields rise, stocks become less attractive. This week, I’m looking at how stocks have done after 10-year Treasury note returns overtook the returns on SPX stocks.

Double chart 1

The previous signals

Using monthly numbers since 1953 (as far as we have 10 year Treasury bill data), the following table lists events where bond yield exceeded the dividend yield on SPX stock. Five of the seven signals came after the bottom of the financial crisis in 2009. The results are mixed, with short-term results underperforming but longer-term returns outperforming.

If you ignore the first two lines with 1950s results, you will get three negative returns, one flat and only one decent return, a month after these cases. Three months later, you get two returns that are above the overall average, one near-balanced and two negative returns, including a 20% loss in the first half of 2020.

On that basis, a potentially less attractive dividend yield is a catalyst for a stock market sale. The six- and twelve-month returns tell a different story, however. The average return after six months following these instances exceeded the typical return for the SPX (4.72% versus 4.36%). A year after the last five events, stocks were double-digit each time.

ten years

Finally, here is a chart from 2007 showing the SPX along with the difference between the dividend yield and the yield for 10 year Treasury bills. The only signal at the end of 2019 was a short-term disaster. That being said, the other signals seem to occur at random times during the uptrend. Nothing looks worrying here, although the numbers above (just five current signals) suggest some short-term weakness.

Double chart 2


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