I am in the camp that we are still in the middle of a secular bull market that started after the Great Recession of 2007-2009. This does not mean that we won’t have temporary setbacks. Indeed, some of them will be deep like the one we just experienced. Remember that historically the S&P 500 goes down on average 14% per year and 30% every 5 to 6 years. The good news is that the declines have always been temporary and the advances permanent.
Two of my contrarian indicators for the equity markets are (1) the 10-year treasury yield Vs. the dividend yield of the S&P 500 and (2) fund flows between equites and bond funds/money markets.
Regarding yields, the 10-year treasury is currently yielding 0.93.%. As far as the yield on the S&P 500, I don’t think I can get an accurate number in this current environment but I would hallucinate that it is above 0.93% and as the economy comes back to life and companies reinstate or raise their dividends the gap will surely widen. In a nutshell, I would recommend putting any long-term money into equities Vs. treasuries to collect a higher income stream with the potential for capital appreciation which historically grows annually at about 10%. Not to mention dividends grow historically at an annual rate of 5% themselves.
Now let’s look at fund flows. As you can see in the charts below, at least since 2015 bond funds and money markets have had huge net inflows while equity funds have had net liquidations. In fact, in 2019 when the S&P 500 was up roughly 30%, investors poured a record amount of new cash to the tune of $413.9 billion into taxable bond funds and a staggering $547.4 billion into money market funds. In stark contrast, U.S. stock funds saw net out flows of $41.3 billion.
Again, I’m not suggesting that we will not have some rough patches along the way but I would argue that you can’t have an equity market bubble until you have euphoria in the markets like we saw before the crash of the tech bubble in 2001-2002.
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David R Henderson