A big bull-market argument has gotten blown away since the election

Bonds won't do well in this environment: Expert

Ignored amid all the excitement over the postelection market rally is that the bulls have lost a key tenet of their pro-stocks argument.

The through most of the seven-year bull market has seen its dividend yield stay above the rate on the benchmark 10-year Treasury yield. The thinking went that in a yield-hungry environment, it actually made more sense to own stocks than bonds.

The 10-year note's brief jump over 2.5 percent Monday morning provided a reminder that the yield argument no longer applies. The S&P 500's dividend yield is just 1.99 percent.

But fear not, stock optimists: The switch may well just be a reminder that as the market matures and economic growth accelerates, the correlation is no longer needed as an impetus to buy equities.

"It was important in getting the rally initiated," said Scotty George, chief investment strategist at Alexander Capital. "As the market really extends, the disparity and the gap between the yields on the two becomes less important than the valuation of the stocks itself."

'TINA' no longer applies

Extended further, this simply could be the end of the "there is no alternative," or TINA, argument, a mindset that even though market fundamentals weren't great, there was nowhere else for money to go.

A few important factors have happened in rapid succession to thwart the TINA argument and to put a little more solid foundation beneath a bull market that has seen the S&P 500 surge nearly 240 percent since March 2009.

Those big changes have happened since the Nov. 8 presidential election in which Donald Trump staged a shocking upset.

For one, a market that was supposed to slide in the event of a Trump victory, instead has gained. As of the market open Monday, the S&P 500 was up close to 6 percent postelection, the Dow industrials had gained 8 percent and the small-cap index had surged a stunning 16 percent.

Economic enthusiasm has grown on the hopes that the new climate in Washington will shift the focus from cheap-money, low-rate monetary policy to an expansionary fiscal policy — that is, lower taxes.

Finally, the dreaded earnings recession appears to have ended, with S&P 500 companies expected to report 3 percent earnings growth and 5 percent sales gains for the fourth quarter. The latter number marks the biggest jump since the first quarter of 2012, according to FactSet.

"The economy seems to be accelerating to the upside. You're getting leadership from the right groups," said Ryan Detrick, senior market strategist at LPL Financial. "We're extremely overextended in the near term, so a little weakness or consolidation makes sense. But it still looks pretty good."

However, most strategists at this point see pullbacks as short-lived.

Winners and losers

As the long-awaited change in yield relationships transpires, another move could come with it — the equally long-awaited "Great Rotation" of money from bonds into stocks.

"Most people are equity-light and bond-heavy. That's just a function of the performance over the past couple of years," said Zachary Karabell, head of global strategy at Envestnet. "This is probably a good time to revisit that allocation."

That pretty much sums up exactly what investors have been doing.

Money flowed at a record pace into equity-focused exchange-traded funds in November, with U.S. funds seeing a net $49 billion in fresh investor cash.

The big winners since Election Day: large-cap focused funds like the SPDR S&P 500 trust ($15 billion) and the Financial Select Sector SPDR ($5.8 billion). Only one bond fund was in the top 10: the iShares iBoxx $ High Yield Corporate Bond fund, which pulled in $1.8 billion. Junk bonds generally follow stock performance, and the past month-plus has been no exception.

Investors, however, pulled money from gold funds, with the two biggest ETFs seeing outflows of nearly $5 billion. Bond funds also saw significant outflows, with the iShares JPMorgan USD Emerging Markets Bond sustaining $1.2 billion in outflows and the iShares iBoxx $ Investment Grade Corporate Bond seeing nearly $1.2 billion in redemptions.

Equity investors overall seem content to sit on their returns heading into the end of the year, pending promised tax breaks in 2017, which could serve as another factor to keep a floor below the market.

The difference in the 10-year and S&P 500 yields "will matter; it's just hard to know when it will matter," said Art Hogan, chief market strategist at Wunderlich Securities. "When you look at this unambiguously better tone for the market, a lot is predicated on what will happen in 2017."

Correction: This story was revised to correct the name of Karabell's firm to Envestnet.