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Data as of 6/8/12 Standard & Poor's 500 (Domestic Stocks) DJ Global ex US (Foreign Stocks) 10-year Treasury Note (Yield Only) Gold (per ounce) DJ-UBS Commodity Index DJ Equity All REIT TR Index
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, Barrons, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
SOMETHING HAPPENED ON NOVEMBER 18, 2008 THAT HADNT HAPPENED IN 50 YEARSwhat was it and what are the implications for your portfolio? Before we get to the answer, we need a brief review of history. Up until 1958, the dividend yield on common stocks was higher than the yield on bonds. This seemed to make sense because stocks were generally riskier than bonds and in order to entice investors to buy stocks, they had to be incented with a higher yield. But in 1958, that flipped. Stock prices rose, the dividend yield fell and the yield on bonds became higher than stocks. For the next 50 years, this relationship remained as bonds continued to out-yield stocks. Then, on November 18, 2008, the relationship reversed as stocks delivered a higher dividend yield than bonds. This was just a brief flirtation and the relationship flipped again shortly thereafter and bonds resumed their usual higher-yielding status. Now, with the dramatic decline in bond yields, stocks are doing that rare thing and delivering a higher yield than bonds, according to the Financial Times. Here are several thoughts on the implications of stocks yielding more than bonds. (1)Investors are more risk averse. With bond yields extremely low, this suggests investors are more concerned about safety than double-digit returns. (2)Bond prices are at an extreme level. With 10-year Treasury yields having recently touched an all-time record low, there may not be much room for them to go lowersince 0 percent is the floor. (3)Government intervention may be distorting the normal relationship between bonds and stocks. Heavy bond buying by the Federal Reserve could be artificially depressing bond yields and rendering some of the traditional market relationships moot. (4)Investor psychology may change over time. Prior to 1958, investors wanted a higher yield from stocks because stocks were riskier. Then, over the next 50 years, bonds had a higher yield as investors became comfortable with the idea that stocks offered a yield plus a chance for capital appreciationeven with more volatility. And now, were back to risk averse investors seeking higher yields from stocks.
Sources: Financial Times, BusinessWeek
From an investment standpoint, seeing a major change in a long-term trend like the yield relationship between bonds and stocks suggests we may be at an extreme level in bonds and stocks. And while nobody knows how long it may take for this relationship to return to a more traditional level, well try to find ways to profit from it on your behalf.