Kass: S&P Yield Eclipses 10-Year Yield

Yesterday afternoon, my friend/buddy/pal, Barron's Randall Forsyth, called to ask me what was the meaning behind the dividend yield of the S&P 500 (3.57%) having had eclipsed the yield on the 10-year U.S. Treasury note (3.54%) for the first time in 50 years.

Many who were interviewed by Randy suggested that the phenomenon signaled a stock market bottom. By contrast, I viewed the significance of the yield differential (or lack thereof) as more of an indication that the forces of economic contraction will be greater than the forces of economic expansion over the next several years.

"It's a general sign of profound risk aversion (and a flight to quality)," adds Douglas A. Kass, who heads Seabreeze Partners Management. "And in a broad sense, the absence of a differential [between the S&P 500 and Treasury 10-year yield] reflects a growing sense that corporate profit growth will be limited over the next couple of years," he says.

-- Barron's, Up and Down Wall Street: "Reversal of Fortunes Between Stocks and Bonds"

In support of my conclusion is that the bond/stock yield relationship in the U.S. has gone global. For instance, the Japanese TOPIX Index yields approximately 2.8%, which is nearly twice the yield on 10-year Japanese government bonds.

I went on to suggest to Randy that the lack of a difference in yield also reflects the low level of expected future inflation, which is best expressed in the TIPS spread (the difference between regular and inflation-indexed notes), implying that the consumer price index will rise by just 0.64% annually for the next 10 years.

If I am correct in my assessment that the meaning of the similarity of the yields on both stocks and bonds is that an extended period of sluggish corporate profit growth lies ahead, we might all be served by the many virtues of cheap tequila.