Just because bonds have become more attractive doesn't mean stocks have become unattractive 😍
History says the stock market could generate healthy returns 👍
Have bonds been getting more attractive relative to stocks? Arguably, yes.
Does that mean stocks are unlikely to offer attractive returns? No.
For those catching up, interest rates have climbed significantly over the past three years. In October, the yield on the 10-year Treasury note rose above 5% for the first time since 2007, almost closing the gap between itself and the S&P 500’s earnings yield (that is, the S&P’s earnings / price).
When the difference between the S&P’s earnings yield and the Treasury yield shrinks or turns negative, buying Treasury securities theoretically becomes increasingly attractive relative to buying stocks.
“This analysis suggests that equities have lost their appeal relative to bonds and has been cited by many bears as a reason to be negative on U.S. equities,” RBC’s Lori Calvasina acknowledged in a research note on Wednesday. “We don’t deny these facts, but a few things have jumped out on our work here that keep us from getting too pessimistic.“