The WSJ reports on new work that shows historically investment-grade bonds have beaten stocks in 40% of ten year periods. What’s more, in many 10-year periods the return on bonds is only about a percentage point less than the return on stocks.
With Treasury bond yields nearing rock bottom levels, it would seem to be a cinch for stocks to beat Treasuries over the coming decade, but today’s historically lofty stock valuations make the calculus more complicated. And if you are willing to venture beyond the safety of Treasuries, the return opportunities in corporate bonds aren’t as depressed as they are in Treasuries.
Mark Hulbert reports for The Wall Street Journal:
The conventional wisdom among investors hasn’t changed for years: Stocks beat bonds in the long run.
This is still a bedrock principle for many, even after the coronavirus lockdowns sent stocks, and the spectacular bull market of recent years, tumbling. Indeed, stocks rebounded with startling speed, launching a new bull market in the process. And looking ahead, some see little reason to believe that stocks will lose their historic edge over bonds. The bar right now is particularly low: Currently, the Moody’s Seasoned Aaa Corporate Bond Yield is just 2.5%, and stocks continue to show their resilience. The S&P 500 yields almost as much—1.8%—and, unlike bonds, equities have the potential to appreciate as the economy recovers and corporate earnings rebound.
However, a prominent dissenting voice has emerged, and he, too, claims to have history on his side. Edward McQuarrie, a professor emeritus at the Leavey School of Business at Santa Clara University, has spent years reconstructing the history of stock and bond returns, extending practically to the birth of the country. And he puts the odds that U.S. stocks will underperform investment-grade bonds over the next decade at a surprising 4 in 10.
Most investors will be dismayed by those odds. A decade, after all, ought to be long enough for stocks to assert their historical dominance over bonds,
But Prof. McQuarrie’s analysis is based on close study of stock and bond returns going back to 1793. And he has found that bonds outperformed stocks in 38.7% of all 10-year periods since then. (See accompanying chart.)
Prof. McQuarrie furthermore has found that, in many additional 10-year periods, bonds lagged behind stocks by less than an annualized percentage point. Investors during those periods presumably felt that stocks didn’t offer enough compensation in return for the considerably greater volatility and risk incurred by owning them. If you count all 10-year periods in which bonds either beat stocks or lagged behind by less than an annualized percentage point, bonds held their own 51% of the time since 1793.
Read more here.