Stocks and bonds – a legendary paper matched set. According to conventional financial wisdom, they go together like a horse and carriage: We should buy stocks for capital appreciation, and bonds for income. Stocks are for profitable risk; bonds are for safety. This is why financial advisors repeatedly counsel us to buy stocks when we’re young, and gradually move over to bonds as we grow older.
But what if things aren’t working out that way? Suppose some investors decided to switch things around, and started purchasing stocks for income and bonds for capital appreciation?
In an article Monday in MarketWatch James Abate, chief investment officer at Centre Asset Management LLC, says that’s exactly what’s happened. “The world has turned upside down,” he observes. With investors turning to stock dividends for income because yields on trillions of dollars in government debt (bonds) have been sliding, “It is a poison brew that central banks keep serving us.”
A Global Financial Data study citing over two hundred years’ worth of data reveals that in 2016 the U.S. is sitting on the lowest bond yields ever. Even the yields on higher-rated investment-grade corporate bonds have been declining, though foreign investors have still been grabbing them up, simply out of desperation to get away from bonds with negative yields.
Apparently, old investment habits die hard. Monday’s MarketWatch article quotes Aaron Kohli, interest-rate strategist at BMO Capital Markets, as saying the demand for bonds “seems to be insatiable.” The article goes on to cite a report by Bank of America Merrill Lynch showing investments in U.S. fixed-income funds and ETFs rose to almost eight billion dollars, the highest since February 2015.
Of concern to professional observers has been the divergence in the standard positive correlation between changes in the S&P 500 and the ten-year treasury yield. Normally, a selloff in stocks stimulates a decline in bond yields. But a decline in Treasury yields as stocks reach record highs marks a defiance of the trend.
What’s troubling in this trend reversal is, when investors continue to ride stocks to new highs, then those stocks abruptly correct, their traditional bond fallback position will offer no cushion in the way of income and safety. As a report by BAML’s Global Rates and Currencies Research team recently noted:
“Too often we have heard how declining interest rates are good news and are used as a justification for investors being pushed out [of] the risk spectrum. We disagree and argue this time is different and the decline in rates should be interpreted as a bad sign….”
The question now: Is there a way to accomplish the three vital strategies for making (and keeping) money in this new world order—that is, to:
- Reap the benefits when stocks are high
- Secure those gains by putting them where a seesawing market can’t decimate them
- Create that vital cushion for the hard landings that are an inevitable part of investing in stocks
I’ve said it before: precious metals is a smart and easily accessible way to accomplish steps two and three in one fell swoop, whether in your regular investments or, particularly, in your retirement portfolio. The trick is remembering the oldest axiom of Wall St., buy low, sell high – and then doing it. Take your gains off the table before a ravenous bear eats them, and secure them with gold and silver; assets that are impervious to inflation and inverse to flailing markets and the devalued dollar.