Why buy US stocks when you can earn more than 5 per cent in short-term bills? Many commentators and analysts are asking this question, and one can see why. Rock-bottom yields forced investors into risky assets over the past decade. However, hawkish policy is now rewarding caution, says Morgan Stanley.
It notes the S&P 500′s dividend yield is just 1.7 per cent, compared with more than 5 per cent for six-month treasury bills. The potential for competition is also noted by Deutsche Bank. Aggregate global equity positioning has fallen sharply lately, with money instead flowing into short-term bonds. High yields on almost risk-free assets mean investors are “being offered a gift”, says Ritholtz Wealth Management’s Ben Carlson.
Will this hurt demand for stocks? It makes sense in theory, says Carlson; why take risk when a guaranteed 5 per cent yield is “there for the taking”? However, the historical evidence is inconclusive.
Yes, stocks fared poorly in the 1970s, when treasury yields were elevated. However, stocks soared in the 1980s and 1990s, when treasury yields were also high. Additionally, Carlson notes there have been 25 years where short-term yields averaged over 5 per cent. Annualised stock returns in those years was 11 per cent – an above-average performance.
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This time may be different – investors might reject stocks and pocket those 5 per cent yields. However, history shows stocks are not guaranteed to do poorly, says Carlson, just because cash is offering higher yields.
