A major case for owning stocks just evaporated

For months, bulls have argued that owning stocks over bonds is essentially a win-win proposition.

Not only do stocks generally have more potential to show capital appreciation, but the S&P 500 actually yielded more than the 10-year Treasury note, meaning that an income-seeking investor actually had an incentive to own stocks rather than super-safe bonds.

Now, after 11 months of that condition persisting, 10-year yields have finally risen back above the S&P 500 dividend yield.

The shift comes as Donald Trump's win, combined with Republicans maintaining a hold on the Senate and the House of Representatives, spurred a belief that coming fiscal stimulus will lead to economic growth and hence a rise in inflation.

As inflation expectations grow, bond yields tend to rise as well, since they have to compensate for the concern that the value of the money bondholders receive later could prove to be lower than its current value.

Meanwhile, on the other end of the seesaw, a substantial gain in the market has moderately decreased the current dividend yield.

This shift would appear to be negative for stocks, but some say there is a substantial silver lining. After all, bond yields do appear to be rising on short-term growth expectations, and if the economy manages to pick up, that would clearly be bullish for equities.

"It's not a valuation story, it's an economically optimistic story," Eddy Elfenbein, editor of the Crossing Wall Street blog, told CNBC on Friday. And even when it comes to dividends alone, "there's probably a good reason to think dividends will grow into 2017 and 2018."

In other words, the old, odd situation gave stocks a reason to rise, but now that the situation has been reversed, there is an even meatier catalyst for a continued move higher.

Win-win indeed.


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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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