Stocks may rally but don’t forget cash and bonds

Stocks may rally but don't forget cash and bonds

That’s where bonds and cash come in. They provide solid income with far less risk than stocks — in theory, anyway.

It hasn’t been a good year for bonds.

At the beginning of the year, money market funds paid virtually no interest and bond returns ranged from average to terrible, depending on the month. Stock was said to be the only game in town.

Interest rates rose as the Federal Reserve battled inflation and the bond market crashed. Because yields (interest rates) and prices move in opposite directions, and yields started at a lower level, rising interest rates caused the bond market to suffer the most in the past century. The Bloomberg US Aggregate Bond Index, a benchmark for investment-grade bonds, looks set to fall 15 percent in 2022, according to FactSet. The S&P 500 was even worse, down 20 percent, though that was little consolation if you held a lot of bonds, or bond funds, that you considered safe.

Now, this is a different scenario.

Bonds are more reliable than they were last year because yields are already higher. Even if they do move, there is now a plush cushion, and any potential price declines must be offset, and then to some extent, by the income the bonds are generating. Bond mutual funds and exchange-traded funds are also unlikely to experience a decline in last year’s range. “Bond math tells us it won’t happen,” cathy jonesthe chief fixed income strategist at the Schwab Center for Financial Research said in an interview.

Together federal funds rate Above 5 percent, the rich yield is spread across money market funds and Treasury bills of up to one year. Now that the debt ceiling battle is behind us, and the Treasury is issuing massive amounts of fresh debt, it’s fair to say once again that those investments are safe. You can’t make that claim about tech stocks.

There are several ways to compare the valuations of the stock and bond markets.

This is a bit weird.

Basically, the higher the bond yield and the lower the stock yield, the better the bond, and vice versa. One long-standing metric involves comparing the trailing 12-month earnings yield of the S&P 500 with the yield of Treasury securities. At present, Bond is doing well in this horse race.

S&P Income Yield 4.34 percent, That’s made it lower and, in some cases, less attractive than the ultrasafe 5 percent-plus yields on one-year Treasuries, according to FactSet. investment-grade corporate bond Are attractive too. The yield on 10-year Treasuries is low, well below 4 percent, reducing their appeal.

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