Good article this week on the sales pitch
hogwash served by the long-always-stocks crowd urging equities are cheap and attractive today relative to bonds. (Actually they say this everyday at every price, since they are always in the business of selling people the dream of long-term equity returns.) Most often (and especially during secular bears) the dream proves a nightmare for gullible clients. The much espoused “Fed model” is one of many misleading arguments used to herd clients into risk.
“Is it true that stocks are cheap “when compared with bonds”? That’s the line on Wall Street. If you haven’t heard it from your broker yet, you will. Indeed, in a recent report, some investment strategists from big brokerages, in their enthusiasm for stocks, argued that they were at record lows compared with bonds…
Consider what that means in practical terms. Bond yields are low today because the market is expecting very low growth and low inflation. But if that materializes, corporate earnings will rise more slowly than in the past, or may even fall. That’s grounds for caution, not optimism, about stocks. It’s also the case that today’s profit margins are near record highs. The only way earnings are likely to grow from here is if inflation picks up. If that happens, good luck with those bonds, whose prices would plummet.
When I heard someone pushing the Fed model recently, I started to think about overseas comparisons. By the model’s logic, in early 2008, both the Italian and Greek stock markets were an absolute bargain. Both sported earnings yields of about 10 percent, more than twice the yield on their country’s 10-year bonds. Oops…”