An extended spread in the S&P 500 earnings yield over the 10 year Treasury rate has signaled a prolonged stock market rally in the past.

The current earnings yield for the S&P 500 is 368% greater than the 10 year Treasury rate.  With the exception of a brief period last fall when there was a panic to own Treasuries, this degree of disparity between the earnings yield and the risk free interest rate on Treasuries was not only unprecedented but unthinkable. 

There have only been 14 quarters since 1970 when the earnings yield has exceeded the 10 year Treasury rate by more than 150%.  In 11 of those instances (78.6% of the time) the S&P 500 went on to gain an average of 20.2% in the ensuing 12 months.  The average next 12 month gain for all instances was 13% – better than the average annual gain in the market.  (I discussed this topic in a prior post here).  Jeb Terry, Sr. February 9, 2012

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