Is It Time to Shift from Stocks to Bonds?

Bonds have gone from near zero returns to relatively attractive yields, with far lower volatility than stocks. What should investors do? [Mitch on the Markets] Bond Yields are Back at Attractive Levels. Is It Time to Shift Away from Stocks? U.S. Treasury bond yields have been moving briskly higher across the duration, and generally, safe investment-grade corporate bonds have also been paying more attractive yields. The chart below shows that investors can fetch at least a 3.5% risk-free yield in the current marketplace, which has many wondering if bonds are a better bet in these uncertain economic times.1 Bond Yields Have Gone from Near Zero to Relatively Attractive Levels Source: Federal Reserve Bank of St. Louis 2 --------------------------------------------------------------- [Should Investors Focus More on Bonds?]( It’s evident that bond yields are moving in a positive direction. Should you be switching your focus toward them and away from stocks? Our just-released January 2023 Stock Market Outlook report will provide you with insight to better answer this question. This report will also provide key forecasts to consider such as: - Setting U.S. return expectations for 2023 - Zacks forecasts at a glance - What produces 2023 optimism? - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released January 2023 Stock Market Outlook 3]( --------------------------------------------------------------- The outlook for bonds is certainly different than it had been in the previous decade. Following the 2008 Global Financial Crisis, virtually every type of bond yield marched lower, which made stocks highly attractive by comparison. Corporate profitability was also growing alongside the economic recovery, which resulted in sizable outperformance for U.S. equities relative to U.S. Treasuries and other categories of bonds. The relative performance of stocks to bonds reached new peaks in 2021, even higher than those reached in the late 1990s. Today looks different. Across the U.S. Treasury bond yield curve, investors can earn a risk-free 3.5%+ yield. In the investment grade corporate bond realm, yields are approaching 6% and also have low levels of refinancing risk in a rising rate environment. Compared to the S&P 500’s current dividend yield of 1.7% and a cyclically adjusted earnings yield of approximately 4%, there’s a meaningful case for rethinking bonds’ role in a diversified portfolio. Another factor to consider is how bonds and stocks perform in rising interest rates and inflationary environments. For U.S. bonds, rising rate environments in recent history have meant fairly benign returns, as seen in the table below: Periods of Rising Rates U.S. Bond Market Return February 1994 – February 1995 0.01% June 1999 – May 2000 2.11% June 2004 – June 2006 3.09% July 2012 – December 2013 -0.17% December 2015 – December 2018 1.89% Source: Federal Reserve Bank of St. Louis 4 It’s also true, however, that regular coupon payments and the ability to reinvest in higher-yield bonds as interest rates rise can boost the total return of a fixed-income portfolio over time, but getting this right requires active management. This opportunity in fixed-income is currently top-of-mind for our fixed income portfolio managers at Zacks Investment Management. Stocks also require active management in a rising rate environment, in my view. Since higher interest rates can reduce the value of future earnings – while also raising the cost of capital companies need for investment and growth – certain types of stocks can face headwinds in this type of environment. The stocks that tend to get hit the hardest are ones with elevated P/E ratios and growth companies with low net income, even if they enjoy rapid top-line revenue growth (see: tech in 2022). These are also companies that generally could experience higher debt costs, particularly if they have to roll over debt in a rising rate environment. Higher debt costs can of course compress profit margins, which is not good for earnings outlooks. This is also why value stocks – which tend to have stronger cash flow and balance sheet profiles – tend to be favored in economic slow patches and rising rate environments. As for inflationary environments, stocks have tended to outperform fixed income over longer periods when prices are rising. This is particularly true for stocks that can pass along rising costs to consumers in order to preserve profit margins. Again, value stocks are favored here, as many companies in the value space have pricing power, stable earnings, and low debt. Bottom Line for Investors I certainly do not disagree that there is a strong case for rethinking bonds’ role in a diversified portfolio. Even when bond yields were low in the years following the 2008 Global Financial Crisis, bonds offered non-correlated performance to stocks (generally speaking) to help reduce volatility and create balance. Today, bonds can offer relatively competitive returns to stocks, which I think only adds to the case of including fixed income in a portfolio particularly if an investor is interested in income and lower overall volatility. But for investors focused on long-term growth, I think it’s a stretch to say that we’re entering a paradigm shift where bonds should replace stocks in a portfolio because economic growth is expected to slow considerably for the foreseeable future. At just about every turn in history, the world has produced an innovation or productivity engine that has driven growth and spending forward, and equities are the most effective way to capture that new value creation, in my view. U.S. equities have also endured a bear market in the last year, which means that if history is any indication, forward expected returns are higher than they were before. If the case for bonds is growing, it’s important to keep in mind that the case for stocks is growing, too. To keep an eye on activity in the market and better guide your investment decisions, I am offering all readers our [Just-Released January 2023 Stock Market Outlook Report](. This report will provide you with key forecasts along with additional factors to consider, such as: - Setting U.S. return expectations for 2023 - Zacks forecasts at a glance - What produces 2023 optimism? - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download the Just-Released January 2023 Stock Market Outlook 5]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Let's Set Up a Talk]( Don't put off planning your secure, happy retirement! Get started today by talking to a Zacks Wealth Advisor. [facebook] [linkedin] [twitter] © Zacks Investment Management | [Privacy Policy]( 1[Goldman Sachs. December 1, 2022.]( 2[Fred Economic Data. December 16, 2022.]( 3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 4[T. 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