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Commentary: Stocks may rise, but bonds' outlook is far better
With U.S. stocks rising convincingly over the past month, fund managers and analysts making the rounds on business TV channels are again openly day-dreaming that retail investors, safely parked in bonds over the past two years, will finally come out to play.
Dream on.
Their PR exercise is based on the idea that stock market gains are telling a good story of things to come, which therefore would reduce the need for the safety of bonds.
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Unfortunately, the bond market's generally been much more accurate than stocks at predicting economic trends.
The verdict is in: As the Dow Jones Industrial Average and S&P 500 gained about 7% in July, government bonds also gained and their yields, which move inversely to prices, fell.
Yields on two-year notes, which closely track expectations for the key interest rate controlled by the Federal Reserve, plumbed fresh record lows.
The reason? The economic "recovery" is slowing, as is evident in almost every piece of economic data over the past month, especially in the slower rate of growth in the second quarter.
So what could make retail investors, many of them baby-boomers who've seen their stock investments tumble more than 50% from peak-to-trough twice in the past 10 years, embrace the shaky proposition that stocks are a better deal now just as the economy starts sputtering again?
Fair enough, earning season has shown that corporate America is again able to deliver on profits, thanks to cost cutting, global sales and easier year-on-year comparisons.
But whatever global growth these firms managed to draw from came thanks to massive spending from governments.
That spending, which in the U.S. was too small to begin with, is now fading away, being replaced by austerity measures in large parts of the world.
We were told that cutting deficits, which go up in recessions, was a good idea, because bonds would sell off, and yields -- and the commercial interest rates tied to them -- would soar.
Yields on benchmark 10-year Treasury notes, which are a good measure of growth and inflation expectations and are used to benchmark mortgage rates, did rise from 2.5% in March 2009, when stocks began a massive rally, to nearly 4% in April of this year.
But they're now at 2.9%, going down along with growth expectations.
And with little chance of further government spending to boost the U.S. economy, an increasing number of analysts, including Bill Gross, the co-founder of bond giant Pimco, have joined serious economists in expecting deflation by next year.
And of course, they were joined last week by St. Louis Fed President James Bullard, who ditched his previous fears over inflation. The move fueled expectations that the central bank might eventually announce further easing measures, such as again buying bonds.
Reacting to Bullard's switch last week, Dave Rosenberg, market strategist at Gluskin Sheff, said the Fed's case for doing so is growing stronger by the day. In his daily note, the famously bearish analyst, formerly at Merrill Lynch, made a simple call: Buy bonds now!
More easing from the Fed wouldn't hurt stocks either, mind you. But until a clear economic picture emerges, that's far from a convincing endorsement of why investors should get out of bond funds.
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