After a sharp bear market rally, people are feeling better about stocks. But corporate bonds have not bought into the stock market rally. Aside from noises from the US government, whose actions may or may not pan out, there is little reason for optimism in the real economy, as GDP continues to shrink.
At a time like this, I reissue my call to sell stocks and buy corporate bonds, even junk bonds. When the advantage of corporate bond yields are so large over the earnings yields of common stocks, there is no contest. When the yield advantage is more than 4%, bonds win. It is more like 6% now, so enjoy the relatively stable returns from corporate bonds.
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No quarrel with you on bonds versus stocks. In fact, if you just sell stocks now, based on the model, it will probably work out good. However, cash might be better than both right now. I kind of subscribe to the theory that if we saw it in 1932, we’ll see it now. So if Baa corporates yielded 700 basis points over treasuries then… You get the idea.
Thanks for the great blog. I’ve learned a lot from you, all the way back to the RealMoney years. By the way, if you haven’t done it, read the recent Barron’s interview with Ray Dalio, also his recent shareholder’s letter on the web. Some great insight into depressions. He’s mostly in gold and treasuries.
I work for one of those nasty Wall St. Banks, so I have a 30 holding period. I’ll be able to sell my newly acquired stocks on April 6th. I just hope things stay optimistic for another 10 days.
As for bonds v. equities, maybe you can help me with this one. I’ve been looking at the investment grade corporates thinking they look relatively attractive, but I am concerned about the inflation threat. Do you think that I am overweighing the inflation threat? What effect (on bonds) can I expect if inflation rises significantly again? Does this mean that one is better playing the front end of the curve?
David,
thanks for informative website. Do you think recent performance (divergence) stocks vs bonds might be related to increased threat of inflation, i.e. nominal assets vs real assets perfomance?
I respectfully disagree. IG Bond yields are only attractive relative to treasuries, which are at all-time low yields. Buffett calls it a bond bubble. On an absolute basis, investment grade bonds yield around 6%, which is close to the average of the past 50 years.
As far as bond yields relative to stock earnings yields, you’re clearly looking at very depressed earnings. Only if you believe that equity earnings will remain at these levels for the next 5 to 10 years can you make the case that bonds are cheaper.
We’ve been here many times before. When an asset is selling at a depressed level, we see lots of analysis to “prove” that it will go even lower.
Buy a 5 year IG corp and the best you’ll get is about 6% annualized return. But buy a portfolio of very high quality, dividend paying non-financial stocks at present levels, and in my opinion you have a rare opportunity to see that portfolio double over the next 5 years.
Junk bonds are a slightly different case, but if I’m willing to take the credit risk of a junk bond, I’d rather have the returns that come from owning the underlying company’s equity.
John, I’m talking about buying BBB and below bonds. I am not talking about A and above. Earnings yields are around 4-5% at present. I can assemble a reasonably good portfolio of BBB bonds with yields of 9-10%. Anytime the gap is that wide, BBB corporates are preferred to stocks. Go back to my original model if you want the details. Google “David Merkel The Fed Model.”
Bonds have been a strong source of income at a time when banks aren’t paying their customers to keep money there and boards of directors are being very careful with their dividend policy