Monday, September 19, 2011

Financial Blue Moon

Sam Stovall, Chief Equity Strategist for S&P Capital IQ, pointed out this morning in his Sector Watch commentary that a financial blue moon of sorts has just occurred. The S&P 500 is currently yielding more than the 10-year Treasury bond.

Mr. Stovall explains: “The Farmers' Almanac defines a blue moon as an extra full moon within a season, which occurs only once in a…..while. But when it does, it is supposedly a sign of good luck. In investing, a rarity that occurs even less frequently than a blue moon is the dividend yield on the S&P 500 exceeding that for the 10-year Treasury note. Well, today is one of those days, as the S&P 500’s indicated dividend yield exceeds the yield on the 10-year note. On a quarter-end basis, this has happened only 20 times since 1953. The good news is that in the following 12 months, the S&P 500 rose by an average 20%. The bad news is that past performance is no guarantee of future results. And with the Treasury yield being pressured by artificial actions of the Federal Reserve, rather than the natural effects of the market, one has to wonder if the equity market’s return 12 months from now will be similar to the 20% of the observations that did notlead to future advances, such as in 1956-57. As a result, S&P Capital IQ’s Investment Policy Committee recommends that investors maintain a neutral exposure to equities overall, but advises a leaning toward larger-cap, higher-quality issues (primarily in defensive sectors) that offer an above-average dividend yield.” 



As noted by Mr. Stovall, a 20% rise in the S&P 500 in the next 12 months is not out of the question, but considering the artificial forces that are at work on the yield curve, this occurrence could be meaningless. His advice to lean toward larger-cap, high quality issues with better than average yields during times of uncertainty is worth heeding.


If you are interested in getting Mr. Stovall’s reports on a regular basis go tohttp://getmarketscope.com.


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No position at this time. Position declarations are believed to be accurate at time of writing but may change at any time and without notice.

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