Stock Returns and 5-Year TIPs

Here’s a remarkable stat I just found. Since 2003, when the yield on the 5-year TIPs is 1.11% or less, the Wilshire 5000 Total Return Index has had an average annualized return of 22.5%.

But when the yield on the 5-year TIPS is 1.12% or more, the Wilshire 5000 has averaged -5.0% per year.

The difference is quite striking. I should warn you that that’s a small sample size. Unfortunately, TIPs are fairly new so the data doesn’t go back that far. Intuitively, this relationship makes sense. When real bond yields are high, investors will ditch stocks in favor of bonds. Conversely, when real bond yield are in the dumps, investors will naturally turn to stocks.

Since 2003, the 5-year TIPs has been 1.11% or less, 58.1% of the time. It’s been 1.12% or more, 41.9% of the time.

The good news is that real bond yields are still quite low. The five-year TIPs is currently barely positive (0.16% on Thursday). That’s up from the spring of 2013 when the 5-year TIPs were near -1.5%.

The 5-year TIPs last yielded 1.12% or more on September 4, 2009. If this relationship is to be trusted, it means the stock rally still has room to run.

Posted by on November 17th, 2014 at 10:25 am


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