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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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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