(Bloomberg News) The longest stretch of declines for the Standard & Poor's 500 Index in a year has left valuations at the lowest level ever compared with speculative-grade debt.
Earnings from the past 12 months for companies in the benchmark gauge for U.S. equities reached 6.64 percent of share prices this month, according to data compiled by Bloomberg. That compared with the 6.61 percent average yield on junk bonds, data from Barclays Plc show. It was the first time the spread, a way of comparing debt and equity values, has shown stocks with a higher yield, according to Bloomberg data going back to 1987.
Concern the U.S. economic recovery will falter as the government reduces its unprecedented stimulus has sent the S&P 500 down four weeks in a row, reducing valuations relative to profits. When the gap with bonds approached this level in September, the stock index returned 19 percent in the next six months, doubling the return in credit markets.
"People will recognize that there is something of an anomaly there," Paul Niven, the London-based head of multi- asset investments at F&C Asset Management Plc, which oversees 106 billion pounds ($175 billion) said in an interview on May 25. "You are better to be in equities than credit at this point of the cycle. There is a better valuation cushion."
Greek, Irish Bonds
The S&P 500 fell 2.4 percent in May through last week, after rising to an almost three-year high, as data showed the slowest economic growth since the second quarter of 2010. The gauge lost 0.2 percent to 1,331.10 last week after applications for jobless benefits exceeded forecasts and an index of Chinese manufacturing dropped to a 10-month low. Greek and Irish bond yields reached the highest levels since the adoption of the euro on concern Europe's debt crisis will worsen.
The Barclays index of 1,073 speculative-grade companies, which goes back to 1987, has returned 0.4 percent in May. Yields on bonds rated below Baa3 by Moody's Investors Service and BBB- at S&P have dropped from a record 23 percent in December 2008 as Federal Reserve Chairman Ben S. Bernanke cut the target interest rate for overnight loans between banks to near zero and pledged to repurchase up to $600 billion in government bonds, a program that's set to end next month.
The Barclays high-yield bond index gained 113 percent through last week, including coupon payments, since the Fed last lowered interest rates on Dec. 16, 2008. The S&P 500 returned 62 percent, when dividends are included. The S&P 500 climbed 0.9 percent at 9:44 a.m. in New York today.
Profit Growth
The S&P 500's earnings yield has fallen from 9.89 percent at the start of the bull market in March 2009, while per-share profit has climbed six straight quarters.