Of the things we knew over the years wouldn’t last—Brad and Jen, Britney and K-Fed, John and Paul—one breakup we thought we’d never live to see was the time-honored relationship between the S&P 500 P/E ratio and the 10-year note yield.
Yeah, in case you didn’t know the two trend lines have enjoyed a cozy relationship for the past 40 years or so, moving in lockstep in good times and bad, in market sickness and health, till death or a stock market crash do them part.
Ah, but we have seen the market tumble from its lofty highs, and this is where the divorce happened.
Since about 2006 the S&P yield went one way—up—and the 10-year yield another—down, way down. It’s to the point now where they are more than five percentage points apart and growing.
High yields, of course, indicate high danger, and low yields indicate safety. It is investor aversion to stocks and their growing love of bonds that has produced this phenomenon, pointed out to us this week by noted banking analyst Dick Bove.
“Bank stock investors, my special interest, simply do not want to buy bank stocks,” Bove said in research earlier this week. “They are no longer content with seeing banks drop their reserves to build common equity. They want to see a rise in revenues. This, unfortunately, seems unlikely near term because earning assets are not growing, net interest margins are under pressure, non-interest income is expected to fall, and banks have done a very poor job controlling costs.”
He went on to repeat his long-held mantra that a big wave of M&A is about to occur in the banking sector, which will drive up the value of the acquirers.
Bove also issued an opinion near and dear to my heart and one I debated with some worthy opponents in a Thursday segment of “Squawk on the Street,” namely that about half the world is sitting on the sidelines right now waiting to see what’s going to happen in the November congressional elections.
As for his observations about the divergence between the 10-year note and the S&P yield, I had a hard time digging up traders who were watching the trend.
One of my go-to guys, Dave Lutz at Stifel Nicolaus, thought there was something to it but hadn’t studied it in depth.
But he thought we were on to something, and it’s for sure worth watching as Wall Street tries to recover.