David Rosenberg hasn’t exactly been the biggest equity market bull. So, when he highlights the most compelling argument for equities I think it’s worth listening. Rosenberg says the low interest rate environment continues to force investors into equities:
“The Fed has also completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates. Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises future profit expectations. It’s that simple. And the fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also lifted the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.
I think that for those investors who are running into cash or cash-like instruments or government bonds in the name of safety need to realise that interest income is in a full-fledged bear market and dividend income is in a massive bull market. This is again at least partly related to what the Fed is doing because its incursion into the fixed-income market has dragged five-year Treasury yield down to 60 bps, at a time when the dividend yield in the stock market is closer to 2.3%, for a 170 bps gap we haven’t seen since 1958.”
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