Redrick Terry:
It is now time for 4 Your Money. We’re joined by John Nelson, Financial Advisor at NelsonCorp Wealth Management. John. Welcome back.
John Nelson:
Good morning, Redrick. Thank you for having me.
Redrick Terry:
Absolutely. So we’re getting pretty close to a year out from the stock market bottom back in 2020. So with such a historic rally, we’re starting to see that term bubble, come up more frequently. Do you think that the conditions today are similar to other historical market tops?
John Nelson:
Yes. We’ve certainly heard a lot of that. It’s been in a lot of news cycles where people are concerned about a bubble, just seeing how quickly things have come back after the sell off in early 2020. We see a number of different dynamics there that that is somewhat different than previous times in history. This is being compared a lot to the late nineties, early two thousands, with the dot com bubble, just given how far the technology sector has run. But a lot of other attention is being given to the number of IPO’s or companies that came online last year, that were not showing a profit. And that’s drawn a lot of concern from a lot of investors, both institutional and individual investors.
John Nelson:
But the dynamics are different from the standpoint of the tremendous amount of top-line revenue that we’re seeing from some of those tech companies and the valuations that are typical with some companies don’t necessarily apply quite as well as they do than others. So we understand the risks there and the concern that many have had, but we see a number of dynamics that are just much different than other periods of time when we were facing bubble type scenarios.
Redrick Terry:
So is there something specific that you can point to that kind of shows us the difference between today and some of those other periods?
John Nelson:
Yes. So what I have with me today is a good visual that does what I feel like a good job illustrating the relationship between the current stock yields versus a 10-year government bond. So what we’re seeing here, Redrick, is in the blue line, it’s the earnings yield of the S&P 500. And you can see a lot of volatility there, but all the way to the end of the chart off to the right, we’re at all time record lows. The red line is demonstrating or illustrating the 10 year US treasury and the movement that we’ve seen there.
John Nelson:
So when I pointed out earlier, the differences between this market and previous cycles, where we felt like they’re more bubble type scenarios, is that yellow circle, the first one in the middle of the chart there, is showing a previous low for the earnings yield of the S&P 500 there in the blue. But interest rates or bonds at that time were roughly about 5%. Today, Rederick, we see all time record lows and earning yield for the S&P 500, as well as all time lows in terms of interest rates. So it’s a very different dynamic.
John Nelson:
Someone argued that with these lower interest rates, that’s certainly been a tailwind for the equity markets, because so many investors, again, both individual and institutional investors, have kind of had the mindset that there’s nowhere else to go in terms of getting what is a reasonable rate of return. So these lower interest rate environments where we’re at today is very different than what we’ve seen in the past, even though there are some concerning points with just how quickly the market has run.
Redrick Terry:
So, John, what do you think this means as we continue on here in 2021?
John Nelson:
Our biggest concern right now, or what we’re focusing on a lot is interest rate movements in 2021. Like I said, if interest rates continue to stay low, many view that as a positive for the equity markets, both here in the US and around the world. If we, on the other hand, start seeing some interest rate movement upward, you may see some of those conservative investors that migrated towards equities or a little higher, what they feel is going to be a higher paying investment. They may migrate back towards those more conservative investments that they’ve been very used to. If we get, say to 3% yields on bonds and things of that nature. But if we don’t see that, and those investors continue to stay where they’re at, many of them have gone to equities and we continue to see more flows into equities because that mindset is, there’s no other option, that could be a tailwind for the equity markets in 2021.
Redrick Terry:
We appreciate the info and insight as always John Nelson. Thanks for being with us.
John Nelson:
Of course. Thank you, Redrick.
Redrick Terry:
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