Anticipation of faster U.S. economic expansion best explains why stock prices have risen for months as bonds drop, according to Andrew Burkly, Oppenheimer & Co.’s head of institutional portfolio strategy.
The CHART OF THE DAY depicts one consequence of these swings: the dividend yield on the Standard & Poor’s 500 Index is about the same as the yield on 10-year Treasury notes, and was briefly lower yesterday for the first time in 13 months. When the year began, the S&P 500’s yield was higher by 48 basis points, or 0.48 percentage point.
“Higher growth expectations are already supporting the continued rise in stock prices,” Burkly wrote two days ago in a report. The S&P 500 rose 22 percent from Nov. 15, the last day of its most recent loss exceeding 5 percent, through yesterday.
The advance surpassed the period’s 9.4 percent growth in dividends paid by S&P 500 companies for the previous 12 months, according to data compiled by yield. As a result, the dividend yield dropped by 24 basis points, to 2.043 percent.
At the same time, Treasury yields climbed on speculation that the Federal Reserve would reduce its $85 billion a month in bond purchases, or quantitative easing. The yield on the 10-year note increased 45 basis points, to 2.040 percent, from Nov. 15 through yesterday.
“Stocks would be the clear winner over bonds” in an accelerating economy that fuels earnings growth and spurs the Fed to curtail bond buying, Burkly wrote. Whether the scenario will emerge is in doubt, the New York-based strategist added, because surveys of corporate purchasing managers and other economic indicators have yet to signal faster growth.
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