Yield Vs. Stock Strategy
Today, we are looking at yield vs. stock strategy.
The relationship between bond yields and stock market returns is one of the most important connections in financial markets.
Let’s look at the theory:
In theory, higher yields should make stocks less attractive. When investors can earn a better return from bonds, they may demand a higher expected return from equities as well. That can put pressure on stock prices, especially for expensive growth stocks where much of the value lies far in the future.
However, in practice, the relationship is not always so simple.
Sometimes rising yields happen because the economy is strong, earnings are growing, and investors are willing to take on more risk. In those periods, stocks can rise together with yields.
Other times, yields rise because inflation is high or central banks are tightening policy, and that can hurt stock market returns.
Let’s backtest the theory:
Yield Vs. Stock Strategy
We backtest, of course, and we got the following results for the S&P 500 (after slippage and commissions of 0.03% per trade):
Strategy type: Intermarket strategy.
Market: S&P 500 (cash index).
Performance
- No. of trades: 702
- Average gain per trade: 0.8%
- Win ratio: 63%
- Profit factor: 2.1
- Annual returns (CAGR): 4.1%
- Exposure/time in the market: 7.9% (buy and hold 7.4%)
- Risk-adjusted return: 16.3% (CAGR divided by time spent in the market (0.5))
- Max drawdown: 42%
Trading Rules
We backtested the following trading rules: