A Tough Trade-Off

Chart A Tough Trade Off

Recently, the 10-year U.S. treasury yield fell below the S&P 500 dividend yield for the first time since 2016. A positive spread between the two data sets has typically provided an incentive for investors to favor equities relative to bonds. However, in previous positive spread environments equities were trading at lower relative valuation multiples than today. At almost 16x forward earnings and 18x trailing earnings, the S&P 500 is not at bargain prices. This environment puts income seekers in a tough position. They must either accept lower expected returns by investing in fixed income securities or take on the risk associated with equity markets. Unfortunately, this time around equity markets are not quite as attractive, making the decision that much more difficult.