What Is The S&P Dividend Yield Vs. T-Bill Spread Telling Us?
In my March
5 column, titled “What
Is The Little Guy Telling Us?”, I referred to the
current panic level of retail
investor flow into bond mutual funds and out of equity funds as a good measure
of the overbought nature of the bond markets and oversold nature of the equity
markets. Today, I would like to discuss another measure,
the
average S&P dividend yield vs. the 90 day T-bill yield.
Out of fear, investors have been piling into treasuries,
pushing the yields on these issues to their lowest levels in almost half a
century. Market participants are so concerned about preserving capital that they
are now, essentially, comfortable earning negative returns on short term
interest rates, after backing out inflation. This panic has also driven short-term interest rates below the average dividend yield on the S&P, which is a very
unusual occurrence.Â
At the same time, the average dividend yield on the S&P has
moved higher, as share prices have declined — thus, further widening the spread
over short term rates. To be specific, the average dividend yield on the S&P is
now 1.96%, and the nominal yield on the 90 day T-bill is 1.10%. Clearly the
T-bill offers risk-free returns, but given the current oversold nature of
equities — coupled with negative real returns earned on T-bills, equities are
certainly looking more and more attractive.Â
In fact, the equity markets have
historically gone up by about 9% within six months after a crossover by the two
measurements. So, not only can investors earn better yields with the
average S&P dividend pay out than on T-bills, but they can also participate in
any gains in stock prices.