Photo Credit: Sean MacEntee || Yes, victors write history, and so we are unprepared for the war that does not resemble the past.
Dear Friends, this post is in some ways a hybrid between the posts This Has Never Happened Before and The Rules, Part LXIV “Weird begets weird.”
What I am writing stems from what I have been hearing on Bloomberg Radio and other media outlets where they have bought into the idea that buying growth stocks at any price is the prudent thing to do.
Why do they promote this idea? It stems from the idea that you can’t earn much in bonds, so you must buy stocks. It also stems from the idea that stocks outperform all asset classes over time. “Buy and hold” is a great idea most of the time, but there are occasionally times when it is not the best idea.
I am a student of market history. I know what has happened. But we are in unusual times, and we must try to analyze why the market is behaving strongly. My view is that most of it stems from monetary policy, which is goosing valuations.
This is the awkward thing: the free cash flows of the stock market are reduced, but overall stock prices are higher. Valuations are strained. Is future growth going to be so astounding as to be greater than all of the past?
Stocks are more volatile than bonds, and in a situation where volatility is high, such as is true when interest rates are low, perhaps we should be more favorable to bonds than when equity volatility is low. There are times to preserve capital. The current environment offers a 2.9%/year return on the S&P 500 over the next ten years, versus a 2.5% current yield from $AGG. This is a simple choice — the investment grade bonds are more reliable.
The main thing I want to say is this: toss your long-term assumptions out the window for short-term purposes. With the bizarre policies of the US government, many truths that were self-evident are now on hold. Don’t assume that equities will be dominant in a low interest rate environment. We have no data on this– only a theory.
So with that be careful. Consider what could go wrong and don’t risk too much.
Hi David –
Very good article. One question – is the current yield on AGG 2.5%? Looks like it’s 1.2%.
https://www.ishares.com/us/products/239458/ishares-core-total-us-bond-market-etf
Thanks,
Horton
Actually the yield to maturity is 1.06%
The latest (monthly) dividend from AGG on sept 1st was $0.195. It pays on the 1st business day of each month, except the January 1st payment is sent late December.
Multiply 19.5 cents times 12 months is $2.34 per year. Divide by Friday closing price of 118.10, yields 0.019814 or 1.98% per year.
Note that many monthly dividends in the past 12 months were higher than 19.5 cents, which is why the trailing 12 month yield is slightly above 2.5%.
Also note that the S&P carries extreme reversion to the mean price risk, as “the Fed 5” stocks (FAANGs not to mention Tesla) are completely out of whack with their fundamentals… that is when they have fundamentals to argue about. We all have our opinions exactly when the FAANG will experience a Wyle E Coyote gravity moment, but it will happen sooner or later.