In response to recent stock and bond market rallies, many are asking Russ whether stocks and bonds can continue to advance together. He explains why investors should stick with stocks, which he believes should outperform over the long run.
Last week, both stocks and bonds rallied. Bond yields fell, with the yield on the 10-year U.S. Treasury hitting 2.2% as prices correspondingly rose. Meanwhile, stocks also advanced, hitting new closing high records.
Market Realist – US equities have outperformed major global equity markets in 2014
First, let’s look at the equity market performance this year. The graph above compares the price performance of the S&P 500 (SPY) with the iShares MSCI EAFE Index Fund (EFA)—which tracks the equity market performance of developed markets outside of the US and Canada—and the iShares MSCI Emerging Markets Fund (EEM)—which tracks equity markets based in emerging markets.
The iShares S&P 500 Index ETF (IVV) outperformed international equity markets (QWLD) with returns of 12.3% in 2014. Developed and emerging markets have seen negative returns so far in 2014, with returns of -4.7% and -2.2%.
Although stocks have run up tremendously over the last two years, they don’t look that expensive because GDP (gross domestic product) growth has also gained momentum in the last two quarters.
Meanwhile, bonds (BND) are offering very low yields. With the 10-year Treasury offering a little over 2.2%, you’re barely compensated for inflation, which is currently at 1.7%.
That’s why you should stick with stocks.
The next part of this series looks at where current yields stand compared to historical yields.