{"id":12665,"date":"2023-08-29T14:30:36","date_gmt":"2023-08-29T14:30:36","guid":{"rendered":"https:\/\/zacksim.com\/blog\/?p=12665"},"modified":"2024-01-10T17:15:16","modified_gmt":"2024-01-10T17:15:16","slug":"why-arent-more-investors-selling-stocks-to-buy-bonds","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/why-arent-more-investors-selling-stocks-to-buy-bonds\/","title":{"rendered":"Why Aren’t More Investors Selling Stocks To Buy Bonds?"},"content":{"rendered":"\n

With Rising Yields, Should Investors Sell Stocks and Buy Bonds?<\/strong><\/p>\n\n\n\n

Most investors and readers are aware that interest rates have been on the rise for well over a year now. The yields on savings accounts, CDs, money market funds, and bonds have all gone up. In the risk-free category of U.S. Treasury bonds, the 10-year yield has gone from 1.63% at the beginning of 2022 to over 4% by August 2023.1<\/sup><\/p>\n\n\n\n

It would be reasonable to expect that such attractive yields in the fixed income markets would encourage investors to shift capital away from stocks and towards bonds. After all, the equity risk premium \u2013 which is calculated by subtracting the 10-year Treasury bond yield from the S&P 500\u2019s forward earnings yield (E\/P) \u2013 narrowed to just 70 basis points as of Friday, August 18. By this measure, 70 bps is not a very compelling level of compensation for the added risk of owning stocks versus bonds.<\/p>\n\n\n\n

And yet, we have not been witnessing a dramatic rotation from stocks to bonds. In fact, stocks have largely gone up since last October.2<\/sup><\/p>\n\n\n\n

What Actions Should Investors Take in the Current Market?<\/a><\/span><\/strong><\/p>\n\n\n\n

Want to learn more about stocks, bond yields, as well as other key economic indicators and how they could impact the economy and your investments?<\/p>\n\n\n\n

Today, I\u2019m inviting all Mitch on the Market readers to download our exclusive August Stock Market Outlook Report<\/a><\/span><\/strong> for FREE. This report contains some of our key forecasts to consider such as:<\/p>\n\n\n\n

\u00b7 Top-down S&P500 yearend 2023 and 2024 targets
\u00b7 Zack\u2019s view on equity markets
\u00b7 Setting U.S. returns expectations for 2023
\u00b7 Zacks Rank S&P500 sector picks
\u00b7 Zacks rank industry tables
\u00b7 And more\u2026<\/em><\/p>\n\n\n\n

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!<\/p>\n\n\n\n

Download Our Just-Released August 2023 Stock Market Outlook Report3<\/sup><\/span><\/a><\/strong><\/p>\n\n\n\n

I\u2019ll offer three reasons why.<\/p>\n\n\n\n

The first is simply that rising rates mean falling bond prices. With stocks, experienced investors know that it\u2019s often a good idea to buy stocks when they\u2019re falling or when there\u2019s \u2018blood on the streets,\u2019 because over time stocks follow the expected path of earnings and economic growth. Recessions and bear markets happen, of course, but throughout history, the economy grows more than it contracts, and corporations\u2019 earnings expand and go up. Stocks don\u2019t stay cheap for long, so it\u2019s been wise historically to buy them when they are.<\/p>\n\n\n\n

Bonds are different. When yields go up, the prices of bonds go down. For long duration Treasuries over the past year and a half or so, that\u2019s meant a long stretch of weak\/negative performance. It\u2019s not necessarily in investors\u2019 nature to buy more bonds as prices fall. Instead, investors usually think about whether interest rates may continue to go up or not. In the current environment, there\u2019s not a good answer for where interest rates will settle, which I think is a key reason we\u2019re not seeing a major rotation. The Fed\u2019s inflation fight is ongoing, and the economy continues to perform better-than-expected (which justifies higher rates).<\/p>\n\n\n\n

As a side note here, Zacks Investment Management actively manages our fixed income portfolio based on our forecasts for interest rates, inflation, and economic growth. We\u2019ve tended to stay on the \u2018short\u2019 end of the duration curve for Treasuries because of interest rate risk, while favoring investment-grade corporates for our intermediate and long-duration bond holdings.<\/p>\n\n\n\n

The second reason investors have not been dumping stocks to buy bonds is because for many, owning stocks versus bonds is not an either\/or decision. In our view, having fixed income in a portfolio is not about making interest rate bets to generate excess returns from bond trading. It\u2019s about establishing an asset allocation that meets an investor\u2019s expectations for long-term, risk-adjusted returns. Unless an investor experiences significant changes to their financial situation, goals, and cash flow needs (which of course does happen), then it\u2019s not likely that their asset allocation should undergo a major change just based on recent performance.<\/p>\n\n\n\n

The final reason has to do with the myth that higher interest rates are automatically bad for stocks and the economy. While there\u2019s good logic behind why higher interest rates would crimp growth and profitability, history shows that the U.S. economy and stocks have withstood higher rates on numerous occasions, posting solid growth and performance, respectively, even when rates were much higher than they are today.<\/p>\n\n\n\n

In the chart below, the red box highlights the 10-year U.S. Treasury bond yield during the 1990s, which readers can see marks a period when interest rates were higher than they are today. That was also one of the best times for economic growth, and a great time to be invested.<\/p>\n\n\n\n

Yield on 10-Year U.S. Treasury Bond<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis<\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

I do not want to dismiss the significance of such a narrow equity risk premium, especially when we compare it to what it was just a couple of years ago. In that time, bonds have become more attractive relative to stocks, as yields have gone up, stock multiples have also gone up, and corporate earnings have experienced a weak patch.<\/p>\n\n\n\n

But to also suggest that stocks have limited upside potential in the near- to medium-term because interest rates are high and rising does not comport with what we know about stock performance historically. Earnings could very well surprise to the upside, which means stocks could, too. As for bonds, higher yields also imply higher expected returns in the future, which isn\u2019t bad news at all. It just may mean more volatility in the near term.<\/p>\n\n\n\n

In the meantime, to help you learn more about key indicators that could impact the market, I invite you to download our August 2023 Stock Market Outlook Report.<\/a><\/span><\/strong> This report will give you access to:<\/p>\n\n\n\n

\u00b7 Top-down S&P500 yearend 2023 and 2024 targets
\u00b7 Zack\u2019s view on equity markets
\u00b7 Setting U.S. returns expectations for 2023
\u00b7 Zacks Rank S&P500 sector picks
\u00b7 Zacks rank industry tables
\u00b7 And more\u2026<\/em><\/p>\n\n\n\n

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!<\/p>\n\n\n\n

Download Our Just-Released August 2023 Stock Market Outlook Report4<\/sup><\/a><\/span><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"

Bond yields have been rising for over a year, but we haven’t yet seen a big rotation from stocks. Mitch offers 3 reasons why. <\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[63,71],"tags":[],"class_list":["post-12665","post","type-post","status-publish","format-standard","hentry","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12665","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=12665"}],"version-history":[{"count":3,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12665\/revisions"}],"predecessor-version":[{"id":12669,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/12665\/revisions\/12669"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=12665"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=12665"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=12665"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}