S&P YIELDS VS. BOND YIELDS: I’M YOUR MAN WHEN IT COMES TO STATING THE OBVIOUS

4/16/13

A guest on CNBC this afternoon (I didn’t catch his name; the sound is normally turned off on CNBC and I only turn it on when something interesting, or someone I really want to hear, like Art Cashin, Jack Bogle, or (sometimes) Rick Santelli comes on.  But the guest’s name is not as important as his argument.) was making the bullish case for stocks.   He pointed out that stocks were “under owned,” that the percentage of the public owning stocks is normally 30% but is now 18%.   (Don’t hold me to those numbers; they are the guests and I didn’t verify them.)  He also pointed out that people face lousy potential yields on their bonds and cash and thus will consider stocks, where (paraphrasing)

…half the S&P stocks yield more than 2.5%, which is about what people can get on the proceeds from their maturing bonds, and YOU HAVE THE POTENTIAL FOR GROWTH.  (Emphasis mine)

(See my post from yesterday, SO WHY HAS THE STOCK MARKET DONE SO WELL OF LATE? for a discussion of this argument.)

This is not a bad technical argument for stocks, though the host denied being a technician.  Despite the validity of the argument, though, maybe it’s time for someone to state the obvious for two reasons

1. In general, a firm grasp of the obvious seems to be out of the reach of the more sophisticated types, and
2. this particular jot and tittle of the obvious seems to be escaping people of late.

So here goes…

Yes, the S&P is yielding considerably more (about 30 basis points (“bps”)) than the 10 year treasury and, yes, the S&P has potential for growth.  But stocks also have the potential for shrinkage, and sometimes great shrinkage.  This potential for loss on stocks is far greater than the potential for loss on the 10 year treasury, even at these low bond yields.   And, unlike the prevailing situation with a treasury, there is no assurance (Emphasis mine; see yesterday’s post on stocks again.) that the principal invested in stocks will be returned. 

This is certainly not an argument that bonds are at all attractive; see my 2/26/13 post CZAR BERNANKE’S DIKTAT:   BONDS MUST BE RICH, STOCKS MUST BE CHEAP in which I opined

But, with a Fed engineered bubble to end all bubbles in the bond market, EVERYTHING is cheap relative to bonds.  

This is also not an argument that stocks are necessarily rich; I am simply reiterating a point I made in that 2/26 post

That they (stocks) are cheap relative to a hideously inflated bond market is no reason to buy stocks.

But I also argued for stocks, sort of, in yesterday’s post.  

My important point regarding stocks is that no one knows where stocks are going in any run but the long run and anyone who tells you s/he knows where stocks are going hasn’t been around long enough, or been sufficiently humbled by his or her hubris, to be entrusted with your money.   But I digress, sort of.

My overriding point in this post is not to argue for the cheapness or richness of stocks, or even to reinforce my argument that bonds are insanely rich.   Rather, I am arguing that the “stocks yield more than bonds” argument for buying stocks is dangerously simplistic, especially now in the midst of a bond bubble, and, if followed to its logical conclusion, should bring us to a bad end.