2 year Treasury yield crossed above the S&P 500's dividend yield

You’ve probably seen the following chart, which depicts the 2 year Treasury yield crossing above the S&P 500’s dividend yield for the first time in 10 years.

The 2 year Treasury yield is seen as a “risk free” investment, whereas there is some risk associated with the S&P 500’s dividend yield. (Government bonds are deemed risk free, stocks are riskier).

With the 2 year yield crossing above the dividend yield, this chart implies that investors will shift away from stocks to the more “risk free” 2 year Treasury yield. Essentially, a selling of stocks to buy bonds.

This is a classiceconomic theory that is false in the real world.

  1. The majority of stock market investors/traders DO NOT buy stocks for the dividend. They care more about capital gains than dividends. So there will be little mass-selling of stocks just because Treasury yields > the S&P 500’s dividend yield. Hedge funds, institutional investors, and professional traders control the vast majority of capital in the financial world. Mom and pop dividend investors are by far the minority.
  2. History shows that the U.S. stock market is not affected by the “dividend yield – Treasury yield” differential. Bear markets and significant corrections in the U.S. stock market are not caused by the 2 year Treasury yield crossing above the S&P 500’s dividend yield.

*Our Medium-Long Term Model predicts significant corrections and bear markets.

What history tells us about the dividend yield – Treasury yield

Click here to download the data in Excel.
Here’s a chart depicting the S&P 500’s dividend yield – 2 year Treasury yield.

As you can see, the S&P 500’s dividend yield has been less than the 2 year Treasury yield for most of history! This differential has only been positive after the 2008 crash because the Federal Reserve has artificially depressed interested rates with QE.
In other words, the “dividend yield – 2 year Treasury yield” differential has almost no impact on the medium-long term direction of the U.S. stock market!
Here’s the 2 year Treasury yield.

Here’s the S&P 500’s dividend yield.


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