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One Reason the Stock Market Could Soar 30% in 12 MonthsBy
Tuesday, January 20, 2015
This has happened three times since 1958...
Each time it has happened, stocks have soared by at least 30% in the next 12 months.
Importantly, it is just starting to happen, right now.
The idea is simple...
Money moves to where it's treated best. So when stocks are paying you a lot more than bonds, you want to own stocks.
(For specifics, I'm talking about when the dividend yield on stocks is significantly higher than the yield on a 10-year Treasury bond.)
It doesn't happen often. But when it does, you can make a lot of money. And it's happening today...
Stocks are in that rare moment – stocks are yielding more than bonds, today.
Let's take a look at the last three times it's happened, and compare them to today...
In April of 1958, U.S. stocks had a dividend yield of 4.15%. But U.S. Treasury bonds were only paying 2.88% interest.
That's a shocking difference in favor of stocks... Specifically, stocks were paying you 44% more than bonds.
Shrewd investors that bought stocks in April of 1958 did well... Twelve months later, stocks had delivered a total return of 39%.
One year later, this difference was gone... The difference between stock yields and bond yields had flipped back to "normal." Stocks were paying 3.12%, and bonds were paying 4.11%.
It took 50 years for us to see an extreme like that 1958 example again...
On December 29, 2008, stocks were paying 3.27%, while bonds were paying 2.10% – a massive 56% difference. Twelve months later, the total return on stocks was 33%. (Just like in the 1958 example, 12 months after that the difference had switched back to "normal," in favor of bonds, by over a full percentage point.)
It happened again in 2012...
On June 1, 2012, stocks were paying a 2.21% dividend yield, while bonds were paying just 1.45% interest – a truly massive 55% difference in favor of stocks.
Once again, stocks soared from this extreme, delivering a 31% total return in 12 months. (And once again, the stock-bond difference returned to "normal" fairly quickly – by the end of 2013 – with about a one percentage point spread in favor of bonds at the end of 2013.)
I tell you this because it's happening again as I write...
Bond yields have been tumbling all year in 2015. At Christmastime, bond yields were 2.27%. Today, they are closer to 1.8% – a massive fall.
Meanwhile, the dividend yield on stocks today is about 2.0%.
Right now, the difference between stocks' yields (at 2.0%) and bond yields (at 1.8%) isn't large – yet. It's roughly 11% in favor of stocks – not the 50% or so we saw in the three historical extremes.
However, today is the most extreme reading that we have seen other than the extreme times of 1958, 2008, and 2012.
Remember, money flows where it's treated best... Right now, money earns 2.0% in stocks (through dividends), and just 1.8% in bonds (in interest). Right now, money is being treated best in the stock market.
We can't know the moment that this relationship will hit an extreme. But stocks could do well from here... as stocks are where "money's treated best" right now...
In the past, each time the relationship between yields on stocks and bonds reached an extreme in favor of stocks, you'd have made 30%-plus a year in the next 12 months.
The relationship is out of the norm again, in favor of stocks.
In short, keep owning U.S. stocks!
Good investing,
Steve
Further Reading:
Last month, Steve told readers why "the fun ain't over yet" in stocks... "Typically, in major stock market peaks, stocks reach 'bubble' valuations before it's finally over. We are simply not there yet." Click here to see why.
Steve says many countries around the world have seen their stock markets soar in recent years. "So it's hard to find investments that are cheaper today than they were in March 2009. But there is one out there..." Find out what it is right here.
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