Thursday, January 24, 2013

It's The Economy Stupid: Stocks versus Bonds

Stocks versus Bonds


It’s earnings season.  In general, the majority of the stocks of the S&P 500 Index are beating their earnings estimates.  In general, the majority of the stocks of the S&P 500 Index are beating their revenue estimates.  The S&P 500 Index is at a 5 year high, currently trading at 1499.76, trading all around the 1500 mark, a mark not seen since 2007.  Meanwhile, bonds are trading at record low interest rates.  Rates not seen since before World War II, and World War 1.  The Treasuries high yield mark was set in 1981 when the generic T-Bill traded at a 15.91% yield, and the generic 30 Year Treasury Bond traded at 15.21%.  Rates have been headed down ever since then.  But here’s the thing.  Despite all the money the Fed is throwing at the bond market, rates are not going any lower.  And that’s important. The Fed is getting less bang for the buck in each of their successive QE strategies.  They’ve run out of juice, but not money.  They can just print money.  They can just increase the Money Supply.  If ANY inflation shows up in the economy, interest rates are going to go UP, Bond prices are going to go DOWN. 


Meanwhile, the economy is steadily, if slowly, improving, growing.  It does not take a genius to see that Bonds are going to be in a bad way in inflation shows up in the economy.  Meanwhile, stocks are prospering with steadily improving balance sheets and income statements.


Undoubtedly stocks have been on a rise.  And undoubtedly there will be a pause, possibly a correction in stock’s current run up.  Use any pull back to buy more stocks and lighten up on bonds.



John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury


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