Wednesday, June 6, 2012

Stocks Versus Bonds

Bonds have been superior investments for some time, particularly on a risk-adjusted basis.  As a result, there has been a torrent of withdrawals by individual investors from equity funds into bond funds.  Stock performance relative to bond performance peaked in 2000 and has been in a declining trend ever since.  With interest rates at historic low levels, might this relative performance reverse?

Dividend yields on stocks now exceed the yield on Government notes, which hadn't happened since the 1950's.  With yields on 10-year U.S. Treasury Notes at only 1.5% versus more than 2% on the S & P 500 stock index, on an income yield basis stocks are as cheap versus bonds as they were in early 2009, before stock prices generally doubled.

Despite bonds being a haven when investors are fearful these days, I suggest beginning to draw down cash and also shift from U.S. government bonds to buy some depressed stocks.

Steve Lehman

 S & P 500:  1278

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