The S&P 500 has a negative return of 22% so far this year, and the Bloomberg U.S. Aggregate bond index has slid 11%.
Both stocks and bonds have tumbled in recent months amid rampant inflation and interest-rate increases by the Federal Reserve.
The S&P 500 has suffered a negative total return of 22% so far this year, and the Bloomberg U.S. Aggregate Total Return bond index has slid 11%.
So for investors who have cash they want to put to work, which represents a better bargain, stocks or bonds? The Street asked five experts, and their responses were mixed. Three said equities, one said bonds, and the fifth said neither one.
Full Cycles Favor Stocks
David Tankin, a fixed-income portfolio manager at Frost Bank, sees stocks as the better bargain. He thinks inflation will slow in the next three to five months. Consumer prices soared 8.6% in the 12 months through May.
The supply chain will likely improve, helping to push goods prices down, Tankin said. And the sharp rise in mortgage rates will likely blunt demand for homes, putting downward pressure on home prices.
The 30-year fixed mortgage rate averaged 5.78% in the week ended June 16, up 2.85 percentage points from year earlier.
As for the service sector, “while it has [strong] inflation now, I think that the current environment – stocks down and interest rates up – will create a consumer slowdown,” Tankin said. He believes the Fed can engineer a soft landing for the economy.
This scenario should be good for stocks and bonds, but more so for stocks than bonds, he said. That’s because “stocks always outperform bonds over a [market] cycle.”
Mick Heyman, an independent financial advisor, also chose equities as the better bargain. They have a more favorable outlook if the stock and bond markets rise or if they fall.
If the economy weakens because of Fed rate hikes, and it then cuts rates, “the upside for stocks is huge,” he said. But given that the Fed wouldn’t have that much room to cut, as it would be starting with rates at a low level, bonds would rise maybe 3% to 4% a year, Heyman said.
“Can stocks outperform that?” Heyman asked rhetorically. “I say yes.”
If the Fed keeps raising rates, stocks will likely fall, but so will bonds, Heyman said. “Bonds could easily go 10 to 15%,” he said. Even if stocks initially fall further then bonds, stocks have more potential over the long term, he said. Historically, stocks have outperformed bonds.
If you invested $100 in stocks in 1928, it would have been worth $761,711 at the end of 2021, including dividends, according to the calculations of Aswath Damodaran, a finance professor at New York University.
Meanwhile, $100 invested in 10-year Treasury bonds would have produced only $8,527. “For any long period of time you’re better off in stocks,” Heyman said.
Another Vote for History
Michael Sheldon, chief investment officer at RDM Financial Group Hightower, also selected stocks as the better bargain, given their historical outperformance over bonds.
“Bonds provide income and stability, while stocks provide income and growth,” he said. “Stocks have more upside potential, but are more volatile.”
Even during this inflationary period, some companies can raise prices and increase their earnings higher than inflation, Sheldon said.
Bonds as a Hedge
Jack Ablin, chief investment officer at Crescent Capital chose bonds as the better bargain. Both stocks and bonds are basically at fair value after their declines, he said.
But, bonds are probably a better deal than stocks right now, at least over the next couple quarters, Ablin said. That’s because “bond yields are high enough to serve as a hedge for stocks,” he said. The 10-year Treasury recently yielded 3.23%.
No Great Bargains
Chris Litchfield, a retired hedge fund manager and now a private investor, is neutral on the bargain issue. “I don’t think either stocks or bonds are much of a bargain,” he said. The Fed’s rate-increase campaign is bad for both asset classes, he noted.
“I believe in the adage don’t fight the Fed,” Litchfield said. “It’s a bad time to be doing anything in markets. The Fed overrides everything else.”
He thinks stocks have completed only half to two-thirds of their ultimate downturn. “When you have a wildfire, stocks are vulnerable,” he said. And with the Fed tightening, so are bonds.