Dividend Yields, Bond Yields and Macroeconomic Policy

Last week Aaa rated Johnson & Johnson (JNJ) sold 10 year bonds at a 3.15% yield, well below the 3.71% dividend yield on its common stock. Old codgers like myself remember that stocks in general, with the exception of 1929, invariably yielded more than bonds until mid-1958. After that bonds always yielded more than stocks. As I wrote in my "Paradigm Shift" paper for Salomon Brothers in 1995 the reason for the revaluation of share prices then, in the view of Benjamin Graham, was that macroeconomic policy had the ability to prevent depressions. That view was logically based on policy successes that worked to end the recessions of 1948-9, 1953-4 and 1957-8 with the last one being particularly deep.

What the capital markets are now signalling is that stocks are especially cheap in the light of the past 50 or so years of history or perhaps, more ominously, the markets no longer believe that macroeconomic policy can work in preventing either a depression or a long period of Japanese-like stagnation. In a nutshell, at least for now, it is a vote of no confidence in the Obama Administration and the Fed.

In my own view its a little of both. Stocks are cheap, but the macro environment is extremely troubling. By way of disclosure, my family owns shares in JNJ.