In this segment fromMotley Fool Answers, the cast talks about a few "thatwill never happen" moments in the world of economics and finance that -- surprise! -- actually happened.Next up is the history of stocks and bonds, and how investors approached them as investments, especially when it came to their yield.
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A transcript follows the video.
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This episode was recorded on Nov. 1, 2016.
Alison Southwick:Next one. They said stocks will always yield more than bonds. I mean, come on!
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Robert Brokamp:Right. For the history of the stock market that we know of (from the 1800's up until the first half of the 1900's), stocks actually yielded more than bonds. And it was considered the right way for things to be, because stocks were riskier ...
Brokamp:... so you should be getting a higher yield than from bonds. Then it reversed. It came close to reversing every once in a while throughout history, but then it always went back to where stocks yielded more. Then in 1958, stocks yielded less than bonds, and it stayed that way up until 2008. And when this happened in 1958, basically they were saying that this is a sign that stocks are overvalued, because when the stock prices go up, the yield goes down. People were then saying, "Well, this is crazy. Stocks must be overvalued. We're going to sell our stocks and wait until they yield more than bonds." And if they really did that, they waited from 1958 to 2008.
Southwick:Woah, that's a long time.
Royal:Right, absolutely. So, a lot of that has to do with people's expectations. Because stocks are more volatile, they want a higher yield on those assets. But finally you got to a point where that investor mentality shifted, and they said, "Hey, look. Because these companies are growing earnings, we're willing to accept a lower yield on them now with the expectation of capital gains over time." So, it really was a substantial shift in the market psychology about why you owned stocks.
Brokamp:And it's almost a market-timing indicator. If I see this sell signal, I'm going to sell and wait until it turns green, again. But it didn't do that ...
Brokamp:Things do change.
Royal:And a little bit of it may be, as well, of people looking back at historical multiples, for instance. They're very similar. Hey, this is what they've always yielded historically; therefore, that's sort of a mean-reverting level. But there's no reason to say that that historical level was the right level. That's a values-based question that can change depending on how investors feel.
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