Any traditional yardstick used to measure the duration of economic and equity market cycles is signaling that both the current recovery and bull market are approaching an inflection point.

Conventional wisdom holds the economy and financial market cycles are distinct and driven by different variables. That said, it’s not just coincidence that the current stock market rebound started in March 2009 and the recovery began in May of that year.

Furthermore, the deep recession and violent bear market that preceded the recovery both began in December 2007.

But that’s about all the current economic expansion and bull market have in common. From their low in March 2009 to their high earlier this year, the sustained surge in stock prices has been one of the most powerful in history.

In contrast, the economic recovery has been the weakest of most Americans’ lifetimes. Travel around the world and one will find the same melancholy sentiment that is pervasive in America.

This paradox explains why many have viewed the advance in equity prices as suspect, making this the least loved bull market in modern memory. Skeptics, and there are many, contend that rising stock prices around the world are primarily the result of synchronized global central bank manipulation, raising the question of whether asset prices are out of balance around the globe.

Dividend And Bond Yields
Finding evidence that Fed policy is creating distortions in financial asset prices isn’t difficult. Exhibit One is the gap between 10-year Treasurys and the dividend yield on blue-chip equities. As of early October, 10-year Treasurys were yielding about 2.0% while the Dow Jones Industrial Average was yielding about 2.5%.

That represents a dramatic departure from the post-1950s experience of American financial markets. From the 1930s until the late 1950s, risk-averse investors were so scarred by the Great Depression they expected and received a higher yield from equities than relatively safe corporate bonds.

When depression fears finally subsided, Mr. Market decided that the upside of rising dividends represented a better value than the safety of corporate bonds. Observers like the late Peter Bernstein noted that investors in the late 1950s wrongly assumed this change might be temporary. For the better part of the next 50 years, however, it proved permanent, as dividends generally yielded less than bonds.

Since 2009, however, the relationship between stock and bond prices and yields has changed. Late that year, Wells Fargo fund manager Margie Patel noted that the yield on shares of Clorox, as stable a consumer staple as one can find, exceeded the yield on its bonds.

One might attribute that to post-financial crisis jitters, but six years later the phenomenon remains widespread. Procter & Gamble shares are yielding 3.4% while its bonds give investors 2.7%. Microsoft stock pays a 3.1% dividend while its bonds offer a 2.5% yield. “When people look at marginal relationships, it says the marginal returns will come from yield, not growth,” Patel says.

Is the change in the relationship between blue-chip bond and equity yields a sign of a secular change in how markets price financial assets or is it the result of extreme, distorted monetary policy? One could argue that corporate America is responding to a new reality—scarce growth opportunities for capital projects and competition to satisfy the needs of an older, income-starved base of investors.

Patel, however, believes the Fed’s policy is a major culprit that is no longer helping the markets or the economy. The central bank, obsessed with finding excuses not to raise interest rates, doesn’t need to look far to find them.

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