I wrote in last Sunday’s Kelly Letter:
“Even if the 10-year yield rivals the yield of the S&P 500 for a sustained period, we probably won’t see a mass exodus from stocks to bonds. There’s more to the investing equation than yield, and the price appreciation potential of stocks will keep them a necessary portfolio ingredient.”
I spoke with several seasoned investors about this concept, to double-check that I wasn’t crazy for disagreeing with analyst consensus that TINA—there is no alternative (to stocks)—is leaving the building.
That was the view put forth by Savita Subramanian at BofA Global Research last week. She wrote that the tipping point for investors moving funds from stocks to bonds is a 10-year yield of 1.75%.
One friend reminded me that TINA did not start with the pandemic, but actually way back in 2009. Even the taper tantrum of 2013, when the 10-year yield reached 2.98% on September 5, did not end it. He asked, “Where are these hypothetical yield-at-all-cost investors who supposedly rush into stocks when bond yields are low and back out of stocks when bond yields are high?”
He pointed out, correctly, that bond yields have been higher than stock dividend yields for most of history, but it hasn’t prevented stocks from rising most of the way.
FactSet data back this up.
Since 1995, the 10-year treasury yield has exceeded the S&P 500 dividend yield on just four occasions:
<> The end of the subprime mortgage crash bear market
<> For most of 2012 and into 2013
<> For much of 2016
<> The past year, since the Covid crash
Were those the only times that stocks did well since 1995? Of course not. Stocks did well in these times and in most periods outside of these times. There is no correlation suggesting the stock market needs low bond yields in order to thrive.
Eagle-eyed subscriber Greg added another observation discounting the idea that rising bond yields mean the end of the bull market.
If the only people driving the stock-market rally of 2020 had been yield chasers, we would expect high-dividend stocks to have done best. However, the MSCI USA High Dividend Yield Index returned only 1.7% last year compared with 21.4% for the MSCI USA Index and 18.4% for the S&P 500:
2020 Performance Comparison
– – – – – – – – – – – – – – – – –
+21.4% MSCI USA
+18.4% S&P 500
+1.7% MSCI USA High Div Yield
Conclusion: Pure yield chasers do not exist. High bond yields do not hurt stocks.
