This Uncanny Market Signal is Flashing Again
Note from Louis Basenese: My colleague, Alexander Green, of Investment U, has perhaps the best instincts in the business. With that in mind, in the column below he explains why a recent market anomaly warrants our close attention.
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Just weeks before the stock market made a dramatic bottom in early 2009, I wrote a column entitled “One of the Best Buy Signals in 51 Years.”
It was one of our most widely read columns that year – and syndicated many other places, as well.
I have no idea how many readers acted on my analysis at the time. After all, the financial crisis was in full swing and investor sentiment – to quote Jed Clampett – “was lower than a hog’s jaw on market day.”
But those who bought stocks on this signal made gobs of money in the months that followed. After all, the market essentially doubled between the lows of 2009 to the highs earlier this year.
Now – for only the second time in 53 years – this uncanny signal is flashing again. Here’s what it is and why you should take advantage of one of the best and most accurate signals in stock market history…
Market Yields: Stock vs. U.S. Treasuries
In the first half of the twentieth century, investors found that if you bought stocks only when the market’s yield exceeded the yield on 10-year Treasuries, you would have been in for every single major rally.
The returns were huge – and the system made perfect sense. Stocks are riskier than bonds, market participants reasoned, so they should yield more to compensate for greater volatility and the likelihood of occasional losses.
The system worked like a charm until 1958. Then it stopped cold. Why? Because for the next 50 years, stocks never yielded more than Treasuries.
Public companies began using their cash flow to fund operations and acquisitions rather than paying out dividends to shareholders. With stock yields sharply lower, most analysts reasoned that the indicator was dead, that the yield on stocks would never again top bonds.
And, indeed, it took a full-blown financial crisis but two and a half years ago to finally happen again. With the luxury of hindsight, we can see that was another superb buying opportunity. And today it’s happening yet again, thanks to both the tremendous rally in government bonds and the socking that stocks have undergone. For only the second time since 1958, stocks are yielding more than bonds.
Granted, it’s a squeaker. As I write, the 10-year Treasury is yielding 2.07%. The S&P 500 yields 2.16%. Of course the S&P 500 Index was only created in 1957. It was the Dow that investors used in the first half of the last century. And the yield on the Dow is more than 50% higher at 3.24%.
History Says… Stocks Are a Terrific Long-Term Buy
If history is any guide, that means stocks are a terrific long-term “Buy” right now and Treasuries – which have become a complete bubble and a table-pounding “Sell” in my estimation – are due for a long period of underperformance.
True, GDP growth is likely to be anemic in the months ahead. But – shocking and surprising most investors – stocks (and especially dividend-paying stocks) should do exceptionally well.
There are no guarantees in the world of stock market investing, of course. But as Patrick Henry famously said, “I know no way of judging the future but by the past.”