David Rosenberg: The Most Compelling Argument for Equities

David Rosenberg hasn’t exactly been the biggest equity market bull.  So, when he highlights the most compelling argument for equities I think it’s worth listening.  Rosenberg says the low interest rate environment continues to force investors into equities:

“The Fed has also completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates.  Therein lies the rub.  The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises future profit expectations.  It’s that simple.  And the fact that the S&P dividend yield is triple the yield in the belly of the Treasury curve has also lifted the allure of equities, or at least those that have compelling dividend yield, growth and coverage characteristics.

I think that for those investors who are running into cash or cash-like instruments or government bonds in the name of safety need to realize that interest income is in a full-fledged bear market and dividend income is in a massive bull market.  This is again at least partly related to what the Fed is doing because its incursion into the fixed-income market has dragged five-year Treasury yield down to 60 bps, at a time when the dividend yield in the stock market is closer to 2.3%, for a 170 bps gap we haven’t seen since 1958.”

Source: Gluskin Sheff


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:


  1. After predicting an implosion of the stock market for 4 years, now David is calling for stocks. What a great contrarian signal ! Now that also the perma bears are turning positive it’s time to think the unthinkable… and by the way if economy one day will really picks up I would buy oil (or oil related) and not stocks.

  2. While in the past Rosenberg was proven wrong, I feel there is some merit in his line of thought. Real negative interest rates provide tailwind for stocks. However, such bull markets on steroids lack proper fundamental grounding (i.e. earnings and a sound economy) and hence anything may happen.

  3. Isn’t David a bit late to the party? The merits of his argument were priced in 3 years ago already.

    This is really more like a contrarian indicator.

  4. Valuation arguments based on the risk free rate are taught on finance 101 MBA courses since the CAPM has been around. If one plugs in a T bill rate that is close to zero and add to it the FED promise of no higher rates until 2015, the the market looks reasonably valued, even undervalued even with earnings taking a decent hit. However, this doesn’t provide support, I.e., a floor to the market. It may go down 20% from here for a variety of reasons. And also remember that the equity risk premium is an average number derived from a data set in which the 3 mo. T rate has very seldom been this close to zero.

  5. Mr. Rosenberg is a wonderful marketing guru.
    This is an apples and corn dog comparison; the duration of 5 Year Treasuries and the S&P 500 differs by 50+ years!

    What good is a 2.5% or even greater dividend if your principal has a unquantifiable probability of shrinking by 10, 20 or 30+ percent?

    What people need to understand is that they have to understand the drivers of a particular investment and then create a portfolio with different drivers.

    This old nonsense of desperately seeking over simplified ‘indicators’ is hog wash and does not serve allocators of savings.

  6. And yet where would equities have been but for continued massive deficit spending?

  7. His musings are all very well, sound enough when taken in isolation.

    However surely more important than simple yield arguments are healthy balance sheets, decent enough earnings and critically, recent improvements in household debt ratios.

    Add in the as yet uncelebrated favourable energy projections [for the US] if the refining bottleneck ever gets sorted out, and an inevitability to the fiscal cliff being sorted in one way or another, is there not reason to feel positive about markets?

  8. Cullen, now that you have started Orcam, does that mean that your algo is only reserved for your Orcam clients, and no longer for pragcap readers? i hope not. Also, do you agree with Kristian Blom above that Rosenberg’s comparison is apples to oranges? I agree with @Kristian, and I believe that the proper comparison is the 30yr T bond rate of 2.72% (not negative in real terms) to the S&P 500 dividend yield of about 2.2%. Both stocks and 30yr bonds have very long durations, so the comparison makes more sense, does it not?

  9. BL,

    Now that I am regulated and registered through Orcam I cannot provide anything relating to investment advice at Pragcap. So, Orcam is the only place where I provide specific investment related ideas, insights and indicators. I know that’s a bummer to hear for a lot of people, but that’s the way the regulatory cookie crumbles and the only way to keep the lawyers from calling me. I’ve made all my services through Orcam extremely affordable for small investors as the company is really geared towards the retail client (even the institutional consulting is geared towards their clients). The research is more for the active trader and gives institutional style research for a pretty reasonable price (about $42 per month).

    Regarding Rosie – yeah, I don’t like it when people claim equity yields are comparable to bond yields. They’re totally different asset classes and equity yields are not the same thing as fixed income yields. Especially when one compares the structure of t-bonds relative to equities. Also, the Fed model has been debunked pretty thoroughly by John hussman. It’s generally not fair to compare the two. Plus, the idea that low yields necessarily means higher stock prices is just bunk. See Japan for instance.

    Here’s the Hussman piece on Fed model. http://www.hussmanfunds.com/wmc/wmc070820.htm

    Hope that helps.

  10. One guru and 20 comments. One stupid post and about 20 smart comments. And he is the guru, that’s the problem.