Originally Posted by
adam ali
It's actually quite simple: in unstressed markets, you would expect the dividend yield of stocks to follow bond yields (meaning as bond yields go down, the yield on stocks becomes more attractive relatively speaking, and stock prices move up to reflect that).
However, when investors begin to question the fundamental underpinnings of markets it is reflected in a shift away from riskier assets (lower grade bonds and stocks) and a shift toward safety, i.e., into government bonds. Which is what we're seeing currently.
So you can't always look at govies and dividend yields alone; spreads in other parts of the credit market may be blowing out (in a flight to safety move) and that tells you to be wary of ANY risky asset (in this case, stocks). This subtlety was missed by many who used the traditional "Fed Model" to purchase stocks in 2007-8 and got crushed.