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FOR A FLEETING TIME TUESDAY AFTERNOON, the stars in the stock market were aligned in a configuration not seen in a half-century: shares yielded more than bonds.

Specifically, the dividend yield on the Standard & Poor's 500 stock index touched 3.57% at 1:13 PM Eastern time, exceeding the 3.54% yield on the benchmark Treasury 10-year note, according to Bloomberg News. That's something that hadn't happened since 1958.

I was aware that there was a time when equities provided more income than bonds, but that belonged to a long-gone era. That was a time I knew of only from old movies, yellowed newspaper clippings and stacks of old Life magazines. It was when gentlemen wore suits and fedoras, not just to work but even to the ballpark; when the Dodgers played in Brooklyn; a bygone era already a half century ago.

To contemporary market observers, it's more than nostalgia. For the S&P 500 to yield more than Treasuries suggests the market is very cheap by historical standards, says Jack Ablin, portfolio strategist for Harris Private Bank. "Dividend yield, like price-to-sales, is one of those persistent metrics. We can all quibble about earnings, but dividends, particularly those of the entire S&P 500, are remarkably consistent," he adds.

"You can fake earnings through hanky-panky, but you cannot fake dividends," agrees Barry Ritholtz, chief executive and director of equity research at Fusion IQ. So after a 47% drop, stocks look relatively cheap for the first time in a long time, he adds.

Scott Minerd, chief investment officer for Guggenheim Partners, calls the drop in Treasury yields below the S&P 500 dividend yield a "straw in the wind" that the stock market may be bottoming. Still, he thinks the market is signaling that dividend cuts are in the offing, but this recessionary trend also will push Treasury yields still lower.

Indeed, Paul Kasriel, chief U.S. economist at Northern Trust, agrees the dividend yield on the S&P 500 implies "the numerator in that fraction is likely to decline in 2009."

But to Richard Russell, who started his Dow Theory Letter a half century ago, this reversal of fortune suggests the 10-year Treasury yield is "unnaturally low." After all, triple-A tax-free municipals outyield comparable Treasuries as the headlong flight to quality has boosted the prices of government securities and the dollar.

"It's a general sign of profound risk aversion (and a flight to quality), adds Douglas A. Kass, who head Seabreeze Partners Management. "And in a broad sense, the absence of a differential [between the S&P 500 and Treasury 10-year yield] reflects a growing sense that corporate profit growth will be limited over the next couple of years," he says.

Indeed, that lack of difference also reflects the low level of expected future inflation, Kass adds. That also is reflected in the so-called TIPS spread (the difference between regular and inflation-indexed notes), which implies the consumer price index will rise just 0.64% annually for the next 10 years. Adds Dominic Constar, interest-rate strategist at Credit Suisse, the convergence of stock and Treasury yields suggests that corporations, including banks, have been slow to cut payouts "as the economy teeters on a deflationary abyss."

This would mark a reversal of the trends that pushed bond yields above stock yields a half century ago. After World War II, "growth was in the air, as was slow and steady inflation," says Rob Arnott, the head of Research Affiliates, an institutional advisory firm. "So, yield plus growth (stocks) could trump yield alone (bonds.) For the next 50 years, that was the norm."

At the time, however, it was viewed as an aberration, writes Peter Bernstein, the eminent economic historian. But despite a severe recession then, with real gross domestic product plunging at a shocking 10.4% annual rate in the second quarter of 1958, the CPI failed to subside as in past downturns. After equity yields had exceeded Treasury yields since 1929, the two flip-flopped in 1958 and never looked back.

During the inflationary uptrend of the next two decades, bond yields would soar into the mid-teens by the time of their peak in 1981. That was far above dividend yields, which did rise to 6%, although actual payouts increased substantially.

Even more telling was the relative movements in stock and bond yields over the years. Bernstein calculates that from 1954 to 1969 -- while inflation was relatively low and stable -- bond and stock yields moved mostly in tandem. But from 1970 to 1999 -- the Great Inflation -- bond and stock yields moved inversely. From 2000 on, bond and stock yields have been back in sync.

Arnott takes it a step further. "In a world of deleveraging, both for the financial services arena and for the economy at large, growth is less certain," he says. "And with the economy eroding sharply, so is inflation. If stocks don't deliver nominal growth in dividends and earnings, then their yield 'must' exceed the Treasury yield, in order to give us any sort of risk premium."

Arnott attributes the concern about future growth to concerns about the incoming Obama administration. "The markets are suggesting prospects for growth in the new Administration are very worrisome. Obama can 'create' a market recovery by voicing some strong support for the power of capitalism (he could say 'capitalism with a heart') for global wealth creation."

Perhaps. I would observe that this cycle has been driven by the bursting of a global credit bubble. And that happened with a conservative Republican U.S. Administration, a Labor government in the U.K., center-right and center-left governments in Europe, and a partly Communist, partly market system in the fastest-growing economy in China.

On the positive side, the Group of 20 agreed on broad principles to try to boost growth and avoid protectionism -- a marked difference from the beggar-thy-neighbor policies of the 1930s.

Still, the markets seem to be saying that, notwithstanding the best intentions of governments, the forces of contraction appear to be even greater their powers. In that context, stocks should yield more than government bonds.

Comments: randall.forsyth@barrons.com