Dear readers,
As the CEO of Advanced Wealth Management, I find myself compelled to address the intriguing developments in the financial markets – the ongoing debate between stocks and bonds. The balance of power is shifting, and it’s time to explore the opportunities that lie ahead.
In the span of just 16 months, the Federal Reserve’s overnight rate surged from zero to 5.5 percent, reaching its highest level since 2001. For years, the benchmark rate was artificially held at zero, leaving bonds at a policy-induced disadvantage. However, by the end of 2022, a significant interest rate reset occurred, allowing bonds to finally compete for capital against equities.
During this reset, we witnessed a remarkable divergence between stocks and bonds. As the benchmark 10-year yield rose, the S&P 500 experienced an 18 percent plunge, while investment-grade bonds faced a 13 percent decline – the worst on record. Although it felt like a bear market at the time, the markets were merely realigning to the new interest rate regime. Towards the end of 2022, stocks and bonds found themselves in a more aligned position, indicating a potential balance.
Entering 2023, the dynamics shifted once again. Stocks surged, driven notably by tech mega-caps, while bond prices trended lower due to higher interest rates. Yet, investment-grade bonds retained an edge in the quest for capital, thanks to their lower earnings yields compared to stocks. The data suggests that the S&P should trade at a forward P/E of 18x, not the current 21x, making bonds an attractive alternative at current levels.
However, there are complexities to consider. Stocks need bonds’ support to sustain their momentum, but certain challenges loom. The US Treasury is preparing to expand its quarterly refunding program, issuing over $100 billion of longer-dated notes to address mounting deficits and high interest rates. Simultaneously, the Federal Reserve is reducing its Treasury holdings, leading to more public issuance. While history tells us that higher Treasury issuance doesn’t always result in higher rates, it doesn’t promise lower rates either.
Allow me to clarify that we don’t advocate for a wholesale shift from stocks to bonds. Market dynamics are nuanced. While US large caps capture attention, dividend-oriented stocks haven’t enjoyed the same degree of rally, making them more favorably priced. For over a decade, dividends served as bond substitutes during artificially suppressed interest rates. However, this year’s capital shift towards bonds came at the expense of dividend equities.
At Advanced Wealth Management, we believe quality companies with consistent and growing dividends offer a compelling blend of valuation and the potential to outpace future inflation. This presents an exciting opportunity for investors seeking long-term growth with reduced volatility.
In the world of finance, knowledge is power. By understanding the evolving dynamics between stocks and bonds, investors gain the insight needed to make informed decisions. As we embark on this new era of opportunities, remember that at Advanced Wealth Management, we are dedicated to empowering our clients with the knowledge and expertise to navigate the markets with confidence. Together, let’s harness the power of knowledge and seize the potential that lies ahead.
Sincerely,
Tony Gomes CEO, Advanced Wealth Management
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