Stocks, Bonds and Five Decade Anomaly Returns

Commodity News Center ^ | 10/22/09 | Adrian Ash

[h20skier66]

Stocks now pay way less than bonds once again, but neither pay much...

BLINK and you missed it. US equities offered a greater yield on investment than did US Treasury bonds for less than five months...

And from the day this oddity struck, 18 Nov. 2008, the S&P still had another one-fifth to fall.

"When this inversion occurred, my two older partners assured me it was an anomaly," wrote the late Peter Bernstein in Nov. 2008.

The inversion Bernstein referred to had occurred five decades earlier...back when the dividend yield offered by US equities slipped below the yield offered by Treasury bonds for only the second time in history.

Wake up there at the back! This might be important. Because in 1958, savings were offered a lower return as risk capital in US business than as a loan to Uncle Sam. Which was absurd. The only other time this had happened - and only then for six months - was right at the top of the 1929 stock bubble.

And you can see how the Great Crash fixed that anomaly on our chart above.

"The markets would soon be set to rights," Bernstein's senior partners agreed just as Elvis was getting his Fort Chaffee crew-cut, "with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield."

High risk equals higher return, right? Risk-free bonds should pay less per year...just as they had done for as long as anyone dared to remember. US equities, on Robert Shiller's data at least, offered an average yield 1.8% above Treasuries between 1871 and 1958.

How's that for a law of the universe?

[Freedom4US]

"That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield."

That, and the stock crash soured the public on stocks for decades. The DOW took 25 years just to break even. The public wasn't too keen on banks, either. Many people wouldn't buy any stock from companies that didn't pay a dividend roughly equal to bond yields, much less stock price appreciation. Otherwise, why risk it? Plenty of outstanding stocks have never paid a dividend but that was the way average people invested then if they could be persuaded to at all.

[Freddd]

Now, I’m one of em.