The breach of a key uptrend in the ratio of the S&P 500 to the 10-year U.S. government bond yield suggests either stock prices are headed much lower or bond yields are headed much higher — or both — in the longer term.
Source: Mike Panzner
SPX to the 10-year Yield Ratio
May 15, 2006 6:35am by Barry Ritholtz
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I dont understand the data
11,381 / 5.186 is 2194? Your chart says 250?
What does the bond yield have to do with the S&P price
Shouldn’t it be S&P yield?
By the way, just a few more ticks down on the S&P and the 90 day Exp Moving average is breached, then watch for some real action
I just want to say this is one of the best sites on the internet for econmic data and stories. I never went to college but all this economic stuff really fascinates me. I am just a small time trader.
Thanks for all the great information here.
What does the bond yield have to do with the S&P price
The present value of the future stream of S&P earnings, or the PE, is largely a function of interest rates.
Generally, a 100 basis point rise in interest rates causes the S&P 500 PE to fall by about a 100 basis points.
stay short or buy short hedge funds ….all assets sucks
anyone expecting a technical bounce later today or tomorrow?
It’s a nice line, but it looks to me like you could have drwan a similar line at many points over the last few years and made similar predictions that didn’t come to pass. Are there rigorous statistical analyses that support your conclusion?
i’m short and being careful of the bounce
Apples and oranges. Makes no sense to do a comparison chart between a price and a yield.
I’ve seen the same thing when some people compare the SPX to the VIX. Doesn’t work. You can’t correlate a price and a ratio. The SPX moves higher over time, thanks to inflation. So the price works higher. Yet the VIX simply measure volatility and moves up and down in a range.
So, over time, the SPX/VIX comparison will continue to work higher and higher. But it doesn’t have any meaning.
A better chart would be to compare SPX earnings yield vis-a-vis 10yrYield over time, or compare SPX div yield with 10yrYield.
If you want to compare apples-apples, look at the SPX:UST chart—the nominal price of the SPX vs. the price of the 10yr note.
It pretty much exactly mirrors the SPX chart. The relationship hit a high in March 2000 at 15.90. Hit a low in March 2003 (not in Oct 2002) at 6.87.
Today it’s at 12.35 after tagging 12.69, which was the early 2001 high as well as the neckline of the topping pattern from late ’99 to late ’00.
Don’t know if it means anything either, but at least it is a price-price comparison.
Something is wrong with that chart. There’s no way you can get a flat line in the 80’s by comparing bond yields (which declined) to stock indices (which climbed).
What’s the log plot look like? This looks like a chart dividing something that grows exponentially by something that doesn’t.
Barry,
Would you be kind enough to elaborate a bit more about the meaning(s) of this chart?
It may be obvious to some…but I’m not in that group.
Also, where ar the historical precedents that allow such predictions?
And pray tell what “longer-term” means? 1 year, 5 years? …more?
Keep up the great blog. It’s a daily must for me
it simply means the 10YR yield and the price of the S&P are converging. when the 10YR yield rises more than the S&P the ratio falls. i disagree with previous posts. the yield is a function of the price of the 10YR thus as the yield falls, the price is rising. generally bond prices and stock prices move together. this chart simply shows the outperformance of stocks thru the ’90s. no secret there. notice that the ratio is the same level as ’98ish and 10YRs have outperformed stocks since then. as the ratio falls it means that stock prices are falling faster than bond prices and thus the yield is rising relative to stock prices. it matters because if the risk premium is real stock prices will outperform on the way up and underperform on the way down. a falling ratio means stocks are underperforming which means we could be entering a bear market..
Good answer for a 1st year undergrad student who hasn’t taken an economics course. Stock prices and Bond prices DO NOT move together. They have a very strong INVERSE relationship – that is an undisputable fact. Your short term study of S&P:10yr yield convergence reinforces this relationship. When the yield outperforms prices for extended periods, an adjustment usually occurs to correct this. But there are no grounds to suggest that in any case it is going to lead to a “bear” market. The market is likely to be at a high point, excersise caution, DCA, and be prepared for a likely dip, not a “bear.”