Key Takeaways:
- Cash Yields now exceed earnings from stocks
- The last time this happened was two decades ago
- The higher cash yields bear bad news for the stock market
YEREVAN (CoinChapter.com) — Cash is yielding more than stocks for the first time since the turn of the millennium. According to a recent thread by the independent global investment research firm Game of Trades, this has historically been a harbinger of market tops, rich with warnings for investors.
The key metric at the heart of this concern is the earnings yield, which is a vital determinant of the attractiveness of stocks.
Historical precedents of higher cash yield
To understand the significance of this development, one must delve into the past.
As the Game of Trades post explains, during the Great Depression in 1932, the S&P 500 boasted a remarkable earnings yield of over 20%. At the time, a $100 investment could yield an annual profit of $20 or more, making it a golden era for stock purchases, the post insists.
Fast forward to 2001 and 2021, and we find a unique scenario. The S&P 500’s earnings yield remained relatively high compared to short-term interest rates. The Federal Reserve’s low-interest-rate policy, adopted after the Global Financial Crisis, encouraged investors to pour funds into stocks despite elevated valuations.
Meanwhile, a dramatic shift has occurred in the past year. The Fed has pushed short-term rates from near-zero to over 5%. This has significantly altered the investment landscape. Despite these changes, investors seem slow to adapt.
Earnings yields continue to mirror the levels seen during the Dot Com bubble in the late 1990s. This is indicative of the fact that investors are paying high prices for relatively meager earnings.
Uncertainty in the markets comes to caution investors
A deeper dive into history reveals a concerning pattern.
Since 1950, there have been eight occasions when the spread between the S&P 500’s earnings yield and the 3-month Treasury bill yield turned negative. This development has frequently preceded significant stock market downturns, including the infamous 1929 market crash.
Game of Trades is not the only one that sees warning signs in the higher cash yields. Yahoo Finance Markets Reporter Jared Blikre also warns of the current high cash yield implications.
To make his case, Blikre referred to the chart spreading back to 1950. The chart illustrated the difference between the yields from stocks, specifically the S&P 500 earnings yield, and the 3-month Treasury bill rate. He argued that this difference had turned negative during the current year.
The chart suggests that investors might get lower stock returns than a safer alternative. This phenomenon can indicate potential problems or shifts in the financial markets.
“This has important implications for how investors are thinking about their money because we had an entire generation where people were used to low interest rates, not used to the fact that they could get a living interest rate out of their money market funds,”
he said.
According to him, one must look back to 2001 to find the last instance of this phenomenon. Even back then, the circumstances were quite different, he argued.
As the market experts warn, the current scenario of cash yielding higher than stocks is ringing alarm bells, echoing historical market tops. Investors must remain cautious, recognizing that while history offers valuable lessons, the future of financial markets remains uncertain and subject to many factors.
