Bonds outperformed equities for the 30-year period ending last September for the first time in 150 years
The US financial markets passed two milestones this fall, one that caught headlines for a day and another that went virtually unnoticed, overshadowed by European debt woes and Washington’s political paralysis over the budget deficit.
But IROs may want to take note of how both play on investors’ attitudes toward equities.
The first incident, reported by Bloomberg at the end of October, followed a report from Chicago-based Bianco Research calculating that long-term government bonds have gained 11.5 percent annually for the 30-year period ending last September.
That beat the S&P 500, which averaged 10.8 percent over the same period. Jeremy Siegel, a finance professor at the Wharton School, calculates that fixed income had not outperformed equities over any 30-year period since 1861, reported the Bloomberg article.
The second milestone occurred in November, which saw the expiration date of 30-year and 29-year nine-month treasuries issued in 1981 that carried coupons of 14.1 percent and 14.56 percent, respectively – high watermarks for US long bonds.
With fixed income continuing to outpace stocks so far this year, is equity investing in danger of becoming passé?
Investing in bonds had a great run, but it will be impossible to make 6 percent in the future, believes financial adviser Simon Lack, a former JPMorgan fixed income trader.
The best an investor can hope for is 2 percent on treasuries and 4 percent in high-grade corporate debt, he tells IR Magazine.
Bullish on equities
Fixed income investors betting on a further fall in interest rates to push up bond prices would also face a grim scenario of a faltering economy and rising corporate defaults, Lack continues. He is bullish on equities and remains invested in the market.
He argues that the earnings rebound in the S&P 500 creates a risk premium spread over treasuries north of 700 basis points, a gap that ‘is wide by any measure [and] last reached these levels in 1973, during the Yom Kippur War and the OPEC oil embargo.’
No matter what your view on inflation, ‘lending to anybody for 10 years at less than 2 percent doesn’t seem much more compelling than holding cash,’ Lack says.
Instead, he is telling clients to convert the fixed income portion of their portfolios to an 80:20 mix of cash and high-yield dividend-paying stocks or exchange traded funds (ETFs) that focus on dividend stocks.
Describing his approach as ‘radical’, Lack counters that ‘these are extraordinary times. Public policy is transferring real wealth from savers to borrowers. Federal Reserve chairman Ben Bernake might as well stand on a chair and say, I don’t want you to own treasuries. That’s how unattractive he’s making them.’
IROs can check these four ETFs focused on either high-dividend yield stocks or stocks with a long track record of consistent payouts to see whether their company is in the portfolio:
iShares Dow Jones Select Dividend Index Fund
Schwab US Dividend Equity ETF
SPDR S&P Dividend ETF
Vanguard Dividend Appreciation ETF
