It obviously hasn’t been a very good semester for stocks or bonds. The S&P 500 has generated a negative return of 20% since the start of the year, and the Bloomberg Aggregate bond index has slipped 11%.
This is pushing some investors to exit. For the week ended June 22, global equity funds suffered an outflow of $16.8 billion, including $17.4 billion from the United States. This means that the rest of the world had entries. The US release was the first in seven weeks.
The data comes from EPFR, quoted by Bank of America.
Meanwhile, global bond funds suffered an outflow of $23.5 billion and cash increased by $10.8 billion.
BofA’s Bull & Bear indicator for stocks remained at the maximum bearish level of zero.
“Three-month returns after occasions when the bullish and bearish indicator is at zero are very solid, unless there is a two-standard-deviation event,” like what BofA has called a “recession double dip” in 2002 and the financial turmoil of 2008 and 2011.
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Bond yields have soared this year amid Federal Reserve tightening, despite falling last week.
The 10-year Treasury yield hit a high of 3.5% during the week of June 13. Although the yield slipped to 3.13% on June 23, it remains well above last year’s level of 1.51%.
This rise in yields has made bonds more attractive to investors. And Bloomberg presented statistics showing how this attractiveness has increased relative to stocks.
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Equity earnings yield (earnings per share divided by share price) averages about 5.3%.
That puts the yield spread between stocks and Treasuries at the lowest level since 2018, Bloomberg reported on June 23.
As for investment-grade bond yields, they were just 45 basis points below the S&P 500 yield, the lowest gap since 2010, according to Bloomberg.
This development raises the question of whether equities or bonds represent a better bargain for investors, given their steep declines this year.
On June 16 and 17, The Street.com posed this question to five experts, and their responses were mixed. Three said stocks, one said bonds and the fifth said neither.
A vote for history
Michael Sheldon, chief investment officer at RDM Financial Group Hightower, picked stocks as the best bargain, given their historical outperformance over bonds.
“Bonds provide income and stability, while stocks provide income and growth,” he said. “Equities have more upside potential, but are more volatile.”
Bonds as hedge
Meanwhile, Jack Ablin, chief investment officer at Cresset Capital, picked bonds as the best deal. Stocks and bonds are essentially at their fair value after their decline, he said.
But, bonds are likely a better deal than stocks now, at least over the next two quarters, Ablin said. That’s because “bond yields are high enough to serve as a hedge for equities,” he said.