I often get asked when I think this epic bull market run will end. It’s now the 2nd longest in history and only 1 year short of the record set back in the 90’s in the lead up to the dot.com bust. So do I know when it will finally come to an end? Unfortunately no, that would require something that nobody has, a crystal ball.
Having said that, something I have been keeping an eye on is US Treasury yields. Interest rates have been held artificially low for years now and as a result, there really isn’t anywhere besides equities that traditional investors feel can get a decent rate of return on their money. So no surprise we’ve seen the stock market continue to march higher. But as stock prices move higher, dividend yields tend to move lower. To see why, here’s an example:
Stock XYZ is valued at 100$ and pays a 3$ dividend
– This equates to a 3% dividend yield
Stock XYZ rises in value to 200$, and now pays a 4$ dividend
– This equates to a 2% dividend yield
So if stock prices rise faster than companies raise their dividends, the actual dividend yield goes down. This means less future payout in relation to capital outlay.
S&P 500 dividend yield:
As of today we’re down to just 1.8% which is historically very low. So something that investors will be eyeing as we move forward into 2018 is:
Compared to the S&P 500 is there anywhere else they can get a comparable yield?
2 year US Treasury yield:
The yield on the US 2 year is actually 1.87% now, higher than the S&P 500 dividend yield. This hasn’t been the case for many years now and for conservative investors, it may be something they take into account when rebalancing their portfolio.
1 year US Treasury yield:
Even the yield on the 1 year US Treasury is getting close to the S&P 500 dividend yield. It’s up to 1.71% and on a trajectory to soon surpass dividends as well.
As many of you know I’ve been quite critical of the Fed taking it’s sweet time in raising rates. I’m genuinely concerned for what happens if we see a recession when rates are still this historically low. I think it would have been better to start small quarterly raises earlier, maybe as far back as 2013, but we don’t have a time machine so we’ll just have to see what happens now.
But the fact that yields on short term US Treasury’s are surpassing S&P 500 dividends for the first time since 2007, that may begin to be factored in to long-term investors allocation decisions. Don’t get me wrong, I remain agnostic on the markets and just trade the signals as they come. But as far as potential indicators for a slow down, the relationship between S&P 500 dividends and interest rates is historically a pretty good one. We’ll keep an eye on it.
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