We've only seen this setup three times since the 1980s.
The yield on long-term 30-year U.S. Treasury bonds was recently below the dividend yield of the benchmark S&P 500 Index.
That's a crazy situation – one that shouldn't happen. But here we are.
Yesterday, I showed you exactly why this anomaly is so unusual. And make no mistake – it's rare. We've seen only two other cases... in 2008 and 2016.
Both of those occurrences turned out to be fantastic times to own stocks. And I have no doubt that when folks look back at this situation in a few years, they'll wish they'd stepped up and bought now, too.
Let me explain...
The first time that 30-year Treasury bond yields dipped below the S&P 500 yield was in November 2008...
Stocks were getting crushed in the months leading up to it. U.S. stocks had plummeted 47% from their May peak. And investors wanted nothing to do with them.
Heck, the entire financial system was in question. Back then, the idea of buying was insanity. The housing market was crashing for the first time in history, and everyone was scared the U.S. government couldn't handle the situation.
The consensus in late 2008 was that the beating in stocks would continue. Investors fled to safe-haven assets like bonds to stop the bleeding.
Looking back, though, buying bonds instead of stocks in November 2008 was a terrible idea. It was the exact opposite of what you should have done.
That month wasn't quite the ultimate bottom for the stock market. It fell to slightly lower levels a few months later. But still, if you'd bought in November and held for just one year, you'd have done fantastically. Take a look...
The market soared 45% in a single year. This has only happened a few times throughout history... But it's what's possible when this crazy anomaly appears.
Simply put, you would have done incredibly well betting against the crowd. Owning stocks – not bonds – was the right move. And the same story played out again in 2016...
After a brutal first few months in 2016, we saw another rare occurrence like the one we're seeing today. Stocks were down 13% in just three months, ending in early February. Investors fled to bonds as a result.
This drove Treasury bond prices higher. And since bond prices and bond yields move in opposite directions, it drove the 30-year Treasury bond yield below the S&P 500 dividend yield once again.
But again... buying bonds instead of stocks in July 2016 was a terrible idea. If you followed the crowd, you would've missed an impressive move higher in stocks.
The S&P 500 took off over the next year. Check it out...
Stocks were up 21% over the next year. Today, the market is up 57% in total since then. Again, buying bonds was the wrong call in 2016... You really wanted to own stocks.
It wasn't easy, of course. It was a scary time. And when everyone agrees that stocks are a bad bet, it's hard to be bold and make the opposite move.
That's true again today. We're hovering around all-time highs in the stock market right now. But most folks are scared. The consensus view is that stocks are a bad bet... So the crowd believes moving to bonds is the smart move, as I explained yesterday.
That belief recently pushed the 30-year Treasury bond yield below the S&P 500 dividend yield for the third time in 40 years. If the past two examples are any indication, you want to own stocks... And you want to own them NOW.
Good investing,
Steve
Further Reading
Yesterday in Daily Wealth, Steve explained how the "pros" on Wall Street have it all wrong with the crazy situation in bonds. Catch up here.
"The American consumer, we're told, is facing the worst beatdown we've seen in living memory," Vic Lederman writes. "Jeez... Can everything really be that bad?" The "scare media" is at it again... this time with the debt narrative. Get Vic's take on the situation right here.
U.S. stocks could rally 45% over the next year thanks to today's sentiment. But one sector could crush that return...
QUICK GAINS AS THIS SEMICONDUCTOR COMPANY GETS 'LESS BAD'
Today's chart shows the power of one of our favorite investment strategies...
Regular readers know about Steve's "bad to less bad" trading approach. When investors overreact to bad news, big gains are possible as they realize their mistake. Given the market's recent turbulence, there are plenty of cases where this thesis is playing out. Check out today's example...
Lam Research (LRCX) designs and builds the equipment used to make semiconductors. It's an industry that's always prone to booms and busts, and the U.S.-China trade war hit these companies hard last year. LRCX shares fell nearly 50% from March to December 2018. But folks never stopped buying the electronics that increasingly rely on semiconductors... All this stock needed was a little good news.
As the market digested the trade war and realized that Lam is still highly profitable, shares quickly recovered. They're up more than 90% from their December lows, and recently hit a new all-time high. That's what can happen when a stock gets "less bad"...
