Posts tagged: investment
By Gershon M. Distenfeld, CFA
“High-yield bonds may look like other bonds, but they don’t necessarily act like them. High yield is not closely correlated with interest rates, and in fact, the asset has done well historically during periods of Fed tightening. Over time, the high-yield market exhibits a reasonable correlation to equities, as both are strongly linked to the business results and fundamentals of the companies they represent. But here’s something some investors may not realize: over the past three decades, high-yield bonds have delivered equity-like returns with much lower volatility“.
“Many investors fear that higher valuations suggest that a bear market is imminent. But history suggests that bear markets more often result from factors external to the stock market, such as recessions, wars and credit bubbles. There have been ten pullbacks of approximately 20% or greater since the 1920s.
Instead of trying to time the next market correction, investors should stay diversified to protect one’s portfolio against unforeseen market shocks”.
- Falling Treasury yields have helped push the total return on the Barclays U.S. Corporate Bond Index to 6.6% so far this year, above most other types of fixed-income investments.
- Although yields on investment-grade bonds have fallen, their spreads compared to Treasuries are near the historical median, making them fairly valued, in our view.
- Despite the relatively low yields, we still think investment-grade corporate bonds offer an attractive yield relative to Treasuries.
After a disappointing 2013, investment-grade corporate bonds are once again delivering positive returns, thanks mainly to price gains linked to falling Treasury yields. And although yields on investment-grade corporate bonds are now near all-time lows, we still think they look attractive relative to Treasuries and make sense for investors looking to generate income without incurring too much risk.
Positive total returns
The Barclays U.S. Corporate Bond Index has generated a total return of 6.6% this year—a nice improvement from its 1.5% drop in 2013. In fact, investment-grade corporate bonds have performed better than most other types of fixed income investments this year, including sub-investment-grade bonds, as you can see in the chart below.
Investment-grade corporate bonds have posted strong year-to-date total returns
Stocks have outperformed every other asset in the long-run. In shorter, specific periods however this can vary. Meanwhile, cash is in fact not king as it struggles to keep pace with inflation.
“A recent Gallup poll shows that Americans now believe housing is the best long-term investment, beating out stocks, bonds, and gold. They might be right, only because the average stock investor does so poorly that a home may indeed be their best investment. But housing has historically been a terrible bet for people who think it will return more than inflation. To show you what I mean, I have to tell you about my visit to Yale economist Robert Shiller’s office a year ago.
Shiller — who won the Nobel Prize last year— is regarded as the world’s foremost housing expert. He has married historical data with deep insight into human psychology to offer some of the best housing analysis anyone’s ever produced. “If you look at the history of the housing market, it hasn’t been a good provider of capital gains. It is a provider of housing services,” he explained.
By that, he means a home gives you a place to live, a place to sleep, a place to store your stuff. But that’s it. Americans believed — and still believe — that the value of their home will increase above the rate of inflation. And that, Shiller says, is wrong. Debunking the notion that housing is a great investment is one of his favorite topics.”Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.”
“Well, I think you have to reflect on the fact that it’s done it before. Home prices declined for the first half of the 20th century Read more »
Asset bubbles are notoriously difficult to identify as they are happening. Often times, they only become clear in hindsight. Having said that, Goldman Sachs’ David Kostin offers an interesting stock market chart in his team’s new US Quarterly Chartbook. It shows the sector composition of the S&P 500 by market cap since 1974.
As you can see, sector bubbles manifest when they suddenly explode as a percentage of the S&P 500. The dotcom bubble is very prominent, represented by the ballooning info tech sector stocks. The credit bubble appeared much more gradually as seen in the rise of financial sector stocks. “Financials was only the third sector since 1975 to represent 20% of the market capitalization of the S&P 500,” noted Kostin. “However, Financials share of the S&P 500 market cap has declined from 22% to as low as 9% in early March 2009.”