Why Our President and CIO Favors Stocks Over Bonds
I’ve been in finance for longer than I care to admit now (ok, since 1986) and for the majority of that time I’ve been a bond guy. I’ve always appreciated the complexity of bonds, how so many factors can affect whether any individual piece of debt is an attractive investment or not. My first job in the industry was analyzing government debt. The first fund I managed was a government debt fund. Today I still have a hand running two bond funds.
But as President and Chief Investment Officer for OppenheimerFunds, it’s also my role to research all types of assets. I have to call it as I see it. And these days, if you’re a long-term investor, you want to be buying equities, not bonds. Yes, I see that U.S. stock markets are at or near all-time highs. But the case is pretty clear cut, and I will use a technique I employ with bonds as proof.
As a bond guy, I always care about yields, the amount of interest a bond will pay an investor if he or she buys the bond at that moment. It’s a great starting point to compare bonds to one another, but that yield information also can be used to compare bonds to other assets. You can figure out the relative value between stocks and treasuries by comparing the earnings yield (earnings per share divided by price per share) of the S&P 500 Index to the yield on the 10-year Treasury. The difference between the two is a coarse measure of the “equity risk premium”—the excess return equity investors demand for taking risk—and shows just how high we hold bonds in esteem versus stocks. It appears that we’re overvaluing treasuries by quite a bit.
I’m not saying you should sell all your bonds, if you need fixed income, there are selective pockets of value in loans, international bonds, high yield debt and municipal credits. But in our present circumstances it is clear that core bonds are dear and equities are cheap, relatively speaking.
Based on fund flows over the past few years, many investors have shunned equities for fixed income. But now might not be a bad time to start putting money back into stocks. Just remember that if you are coming back, don’t just limit your exposure to large U.S. stocks. “Core stocks” these days include U.S. stocks and a dedicated, healthy-sized exposure to international equities. Don’t forget to diversify your equity allocation by size as well.
The 10-Year Treasury Yield is generally considered to be a barometer for long-term interest rates. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall.
The S&P 500 Index is a market capitalization weighted index of the 500 largest domestic stocks in the United States. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Past performance does not guarantee future results.
Standard deviation is a statistical measure of performance fluctuations. Generally, the higher the standard deviation, the greater the expected volatility of returns.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value. Diversification does not guarantee profit or protect against loss.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict performance of any investment. These views are as of the open of business on April 1, 2013, and are subject to change based on subsequent developments.
Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.
Before investing in any of the Oppenheimer funds, investors should carefully consider a fund's investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com, or calling 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing.
Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc.
Two World Financial Center, 225 Liberty Street, New York, NY 10281-1008