Sunday, January 25, 2015

S&P 500 Dividend Yield

The note below comes courtesy of Jeff Saut, chief investment strategist at Raymond James.  While such a shift in the spread of the S&P 500 relative to 10-Year Treasuries has happened on very rare occasion (3 times in the last 50+ years), it has portended to incredibly positive results for stocks.  See below:

"The table below lists each time since 1962 that the spread in yields between the S&P 500 and the 10-year Treasury moved into positive territory after not having done so for the last six months. For each period, we list the first day the dividend yield exceeded the yield on the 10-year, and then show the performance of the S&P 500 over the following one, three, six, and twelve months. As the results illustrate, each of these prior instances were great times to buy equities. Following each occurrence, the S&P 500 saw consistently positive returns, with a median gain of 7.8% just one month later to a median return of 33.4% over the following year. While these past performances don’t guarantee similar returns going forward, they are pretty compelling.
As an aside, for market history buffs, the 6/22/62 yield inversion was a result of the President Kennedy steel crisis whereby the steel companies increased prices and the President confronted that price raise with a resulting Dow Dive from 700 to 535 (-23.6%), but I digress. Consistent with the message from the good folks at Bespoke, we think the equity markets are working themselves into a good “buy spot.” Unfortunately, the “buy spot” probably does not arrive until February or March."
As Saut notes, each of the other occasions have happened at points in history when the market was at extremely oversold levels whereas today we sit near all-time highs.  This most recent instance is likely heavily influenced by the Fed's near zero rate policy so it's difficult to feel confident in expecting similar stock market performance over the next year.

But to be sure, we'll be consulting this data point over the course of the year to compare results.

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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