Depressed Bond Yields Are Here To Stay Making It A Bull Case For Stocks
The month of September continues to bring us increased volatility and a down market. Through Thursday’s market close, the S&P 500 is down 7.15% and now putting the index up only 1.90% Total Return year-to-date. This has led investors to ask if this is the beginning of a big market sell off.
To answer that question, we need to put things into perspective. Last month, the S&P 500 was up 7.19% Total Return making it one of the best months since the mid-1980s.[i] We also have to note that historically on average, the month of September has been the worst performing month of the year.[ii] When we combine the two, it starts to provide some insight, that after such a strong month in August, going into September was going to be challenging for stocks. Especially, when September has been traditionally a bad month for equities.
As we wrote on previous market updates, our base case was increased short-term volatility as we got closer to the presidential election. That is why we increased our cash position in anticipation that a broad based market decrease would provide opportunities to buy good companies that were unjustifiably beaten up with the overall market.
Taking a long-term view, we will continue our bullish approach with US stocks by looking to deploy that cash back into equities. Traditionally, most investors have three major asset classes to invest: stocks, bonds and cash. These investors make tradeoffs to invest in those asset classes based on many factors, including the amount of cashflow produced by the investments in the asset classes.
Today, the depressed yields have forced some investors to look to stocks because holding cash or buying a bond just does not make sense. Cash pays about .01% and a bond like the 10-Year US Treasury has a yield of .67%, while the S&P 500 has a dividend yield of 1.84% over the last twelve months. This tradeoff is a tailwind to stocks because an investor can get a higher yield with the potential capital appreciation. Compare that to the tradeoff investors had to make in the year 2000, the opposite was true at that time as bonds had a yield of about 6.5%, while the dividend yield on the S&P 500 was only .95%. We believe this will continue to help stocks move forward in the long-run, although, as we said earlier, in the short-run we expect a volatile market.