This blog post originally appeared on RealMoney Silver on Nov. 19 at 7:45 a.m. EST.
Yesterday afternoon, my friend/buddy/pal, Barron's Randall Forsyth, called to ask me what was the meaning behind the dividend yield of the S&P 500 (3.57%) having had eclipsed the yield on the 10-year U.S. Treasury note (3.54%) for the first time in 50 years.
Many who were interviewed by Randy suggested that the phenomenon signaled a stock market bottom. By contrast, I viewed the significance of the yield differential (or lack thereof) as more of an indication that the forces of economic contraction will be greater than the forces of economic expansion over the next several years.
"It's a general sign of profound risk aversion (and a flight to quality)," adds Douglas A. Kass, who heads Seabreeze Partners Management. "And in a broad sense, the absence of a differential [between the S&P 500 and Treasury 10-year yield] reflects a growing sense that corporate profit growth will be limited over the next couple of years," he says. -- Barron's, Up and Down Wall Street: "Reversal of Fortunes Between Stocks and Bonds"
In support of my conclusion is that the bond/stock yield relationship in the U.S. has gone global. For instance, the Japanese TOPIX Index yields approximately 2.8%, which is nearly twice the yield on 10-year Japanese government bonds. I went on to suggest to Randy that the lack of a difference in yield also reflects the low level of expected future inflation, which is best expressed in the TIPS spread (the difference between regular and inflation-indexed notes), implying that the consumer price index will rise by just 0.64% annually for the next 10 years. If I am correct in my assessment that the meaning of the similarity of the yields on both stocks and bonds is that an extended period of sluggish corporate profit growth lies ahead, we might all be served by the many virtues of cheap tequila.
Know What You Own: Doug Kass mentions the S&P 500, and some of the components that trade on that index include Chevron (CVX), Exxon Mobil (XOM), General Electric (GE), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), Microsoft (MSFT) and Procter & Gamble (PG). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.
Doug Kass writes daily for RealMoney Silver, a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass' daily trading diary, please click here.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV