After posting its worst weekly performance in over a year last week, the S&P 500 rebounded this week to score its best performance since October 2023. The rise was primarily driven by a surge in technology stocks and other growth sectors, anchored by favorably received quarterly reports from Microsoft and Alphabet. For the week, the S&P 500 gained 2.7%, the Nasdaq Composite climbed 4.2%, and the Dow rose 0.7%.
While the bears took cover after the dismal performance of the stock market last week, the bulls looked to robust earnings from corporate America to pull the S&P 500 Index out of its latest morass, despite rising concerns about a significant jump in bond yields.
Which brings us to the discussion of equities vs bonds. With treasury yields close to 5%, many are staying away from equities saying that the equity risk premium (ERP) is simply not worth it. The reasoning is – why take a risk on the stock market that is returning 7% ytd when you can get risk free 5% from treasuries.
Future Wealth’s View
The rationale seems logical until you look at the facts – In 2023, investors poured in $54 billion into long term US government bonds and $23 billion into 20 year treasury bonds only to find that long term treasury bonds have lost 9% year to date. The unfortunate truth about US treasury bonds is they are not really “risk free”. If you can accurately predict when interest rates will fall and you turn out to be right – you have a home run with treasury bonds. Else, when interest rate cuts get pushed out as the situation we are currently in, the bond values tumble leaving investors facing losses. Of course, if one holds the 20 year treasury bond to maturity, they will get the full face value of the bond plus the 5% return. But, name one investor, other than Warren Buffett, who is willing to be patient enough to hold an investment for 20 years?
In the end, predicting timing of interest rate cuts is no more a fool’s errand than trying to time the stock market. The fact is – bonds are no less risky than equities in an unstable interest rate environment.