Getting Your Stocks On

See the chart below? It graphs the spread between the 10-year Treasury note rate versus the S&P 500 dividend yield and the S&P index itself. You’ll note how the two metrics have moved in sync since 2014. Until this year, that is. In March, the yield spread began slumping as the blue-chip index rose to challenge its 2018 highs.

(Click on image to enlarge)

10-year T note S&P 500 yield

So what, you say? Well, the yield spread’s disparate trend is a manifestation of a significant market realignment.

According to research conducted by CFRA, an increasing 10-year yield premium, up to a point, correlates with decreasing S&P 500 returns a year hence. Back in 2016, when the dividend yield exceeded the Treasury rate, i.e., the yield spread was negative, a reasonable expectation for the S&P index would have been a 12-month gain of 18% or so based on five decades of historical CFRA data. As the yield spread turns positive, though, history tends to forecast ever-smaller forward stock returns. In early October 2018, the yield spread topped out at 1.43%, a level that corresponds with average forward S&P returns of just 5%.

And now, with the yield spread slumping to the 0.56% level, a 12-month stock gain around 11% seems more likely. Well, that’s good news.

But if it is, investors seem to be losing their appetite for assuming the risk to get there. The exchange-traded fund market illustrates this dramatically. By comparing the price of the Invesco S&P 500 Low Volatility ETF (NYSE Arca: SPLV) against the Invesco S&P 500 High Beta ETF (NYSE Arca: SPHB), you can get a sense of investors’ enthusiasm for the S&P’s momentum stocks.

(Click on image to enlarge)

S&P 500 risk appetite

As you can see, risk appetite has been waning out of volatility fears. That’s not all. Putting another pair of ETFs side by side – the SPDR S&P 500 Trust (NYSE Arca: SPY) and the Invesco S&P 500 Equal Weight ETF (NYSE Arca: RSP) – allows you to divine the growing concentration or lack of breadth, that’s been accompanying the S&P’s recent price surge.

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Disclosure: None.

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