So far this year, the S&P 500 has returned a negative 22 percent, while the Bloomberg U.S. Aggregate bond index has down 11 percent.
Stocks and bonds have both fallen in value in recent months as a result of rising inflation and Federal Reserve interest rate hikes.
So far this year, the S&P 500 has returned a negative total return of 22%, while the Bloomberg U.S. Aggregate Total Return bond index has dropped 11%.
So, for investors with funds to invest, which is a better deal: stocks or bonds? Five experts were questioned by The Street, and their opinions were mixed. Three people said stocks, one person suggested bonds, and the fifth person said neither.
Stocks Benefit from Full Cycles
Stocks, according to David Tankin, a fixed-income portfolio manager at Frost Bank, are the better deal. Inflation is expected to slow in the following three to five months, according to him. In the 12 months leading up to May, consumer prices increased by 8.6%.
According to Tankin, the supply chain will undoubtedly improve, lowering goods prices. Furthermore, the substantial increase in mortgage rates is expected to dampen demand for properties, putting downward pressure on pricing.
In the week ending June 16, the 30-year fixed mortgage rate averaged 5.78 percent, up 2.85 percentage points from a year ago.
“While it has [high] inflation now,” Tankin added, “I believe that the current climate – stocks down and interest rates up – will generate a consumer slowdown.” He believes the Fed can orchestrate a smooth economic recovery.
He believes that this situation will benefit both stocks and bonds, but that equities will benefit more than bonds. Because “stocks always outperform bonds over a [market] cycle,” this is the case.
Scenarios with Benefits and Drawbacks
Mick Heyman, an independent financial planner, agrees that stocks are a superior deal. If the stock and bond markets increase or decrease, they have a more favourable outlook.
“The upside for equities is significant,” he said, if the economy suffers as a result of Fed rate hikes and the Fed subsequently drops rates. But, because the Fed wouldn’t have much room to decrease rates because it would be starting from a low point, bonds would climb about 3% to 4% a year, according to Heyman.
“Will stocks be able to outperform that?” Heyman posed the question rhetorically. “I answer affirmatively”.
Stocks would undoubtedly decline if the Fed keeps hiking rates, but bonds will also fall, according to Heyman. “Bonds may easily move 10 to 15%,” he said. Even if equities initially fall further than bonds, he believes stocks have greater long-term potential. Stocks have historically outpaced bonds.
According to Aswath Damodaran, a finance professor at New York University, a $100 investment in equities in 1928 would have grown to $761,711 by the end of 2021, including dividends.
A $100 investment in 10-year Treasury bonds, on the other hand, would have yielded only $8,527. “You’re better off in stocks for any lengthy period of time,” Heyman added.
Another vote in favour of the past
Given their historical outperformance over bonds, Michael Sheldon, chief investment officer at RDM Financial Group Hightower, also chose equities as the better bargain.
He explained, “Bonds provide income and stability, whereas equities bring income and growth.” “Stocks have a higher upside potential, but they’re also more volatile.”
Even during this inflationary environment, Sheldon believes that some businesses can raise prices and earn more than inflation.
Bonds as a Hedging Instrument
Crescent Capital’s chief investment officer, Jack Ablin, chose bonds as the better deal. After their falls, both equities and bonds are essentially at fair value, he said.
Bonds, on the other hand, are probably a better deal than equities right now, at least for the next few quarters, according to Ablin. He explained that this is because “bond yields are high enough to serve as a hedge for stocks.” The 10-year Treasury yielded 3.23 percent lately.
There are no great deals to be had.
Chris Litchfield, a former hedge fund manager who is now a private investor, is unconcerned about the offer. “I don’t think stocks or bonds are very cheap,” he remarked. He pointed out that the Fed’s rate-hiking agenda is detrimental for both asset classes.
“I believe in the cliché that you should never fight the Fed,” Litchfield said. “It’s a poor time to do anything in markets right now.” Everything else is subordinate to the Fed.”
He believes the stock market has barely gone half to two-thirds of the way down. “Stocks are vulnerable when there’s a wildfire,” he remarked. Bonds are tightening as the Fed tightens.