Market history is full of wonderful lessons. Not the surface-level lessons either.
The trouble is most people gravitate to the long-run data when first looking into market history. Except, that’s where they stop.
While yes, the data is useful — you learn how the different assets performed over the last century — but it’s just averages. And averages tend to smooth out bumpy rides. The interesting stuff is hidden in those bumpy rides.
One thing we learn is that markets are dynamic. It’s in a state of constant change.
Typically, those changes swing around the average, like a pendulum — moving away from it before reverting. On rare occasions, they don’t. Paradigm shifts.
One such paradigm shift happened in 1958. For decades, stock dividend yields always stayed above bond yields. The spread between the two would fluctuate, of course, but anytime the two yields came close they acted like two magnetics repelling each other.
As stock prices rose, dividend yields fell but never below bond yields. Anytime stock yields dipped close to bond yields, stock prices (or bond prices) would fall, and the spread between stock yields and bond yields would widen again. It was a pattern that investors relied on for its consistency. And it worked well…until it didn’t. Continue Reading…