The Year That Changed The Investment World

The year was 1958. Half a century ago.

Elvis Presley, three years after his debut album for RCA Victor, was inducted into the U.S. Army.

Sputnik fell to earth.

And the relationship between stocks and bonds underwent a profound, fundamental change.

Peter Bernstein, who saw it happen, describes the unprecedented shift in the relationship between equities and bonds in this column, reproduced by John Mauldin:

In the second quarter of 1958, the dividend yield on stocks was 3.9% and the yield on 10-year Treasuries was 2.9%. Three months later, dividend yields were down to 3.5% while Treasuries had climbed to match them at 3.5%. The next three months made history, as stock prices kept rising and pushed the dividend yield down to 3.3% while bond prices kept falling and drove the bond yield up to 3.8%. *** The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.

When this inversion occurred, my two older partners assured me it was an anomaly. The markets would soon be set to rights, with dividends once again yielding more than bonds. That was the relationship ordained by Heaven, after all, because stocks were riskier than bonds and should have the higher yield. Well, as I always tell this story, I am still waiting for the anomaly to be corrected.

Could Mr. Bernstein's long wait be almost over? Though the yield on the S&P 500 remains lower than the 10-year bond yield, that bond yield is equaled by JPMorgan's dividend yield, and AT&T pays almost 6% at today's closing price. GE, 6.2%. Dow Chemical, 6.7%. Pfizer, 7.5%.

Fifty years ago, prudence for investors living on their capital was routinely boiled down to one simple rule, beloved by trust officers across the land:

"Never dip into principal."

Could that concept be about to make a comeback?