Stocks May Be Booming but Don’t Forget Cash and Bonds

Now, it’s a different landscape.

Bonds are more reliable than they were last year because yields are already high. Even if they elevate further, there is a plush cushion now, and any potential price declines should be offset, and then some, by the income that bonds are generating. Bond mutual funds and exchange-traded funds aren’t likely to experience declines in last year’s range either. “Bond math tells us it won’t happen,” Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, said in an interview.

With the federal funds rate above 5 percent, rich yield has spilled into money market funds and Treasury bills of up to one year in duration. Now that the debt ceiling battle is behind us, and the Treasury is issuing a huge amount of fresh debt, it’s fair to say, once again, that those investments are safe. You can’t make that claim about tech stocks.

There are many ways of comparing the valuation of the stock and bond markets.

It’s a little wonky.

Basically, the higher the bond yields and the lower the stock earnings, the better bonds stack up, and vice versa. One longstanding metric involves comparing the trailing 12-month earnings yield of the S&P 500 with the yields of Treasury securities. At the moment, bonds are doing nicely in this horse race.

The S&P earnings yield is 4.34 percent, according to FactSet, making it lower and, in some respects, less attractive, than the ultrasafe 5 percent-plus yields on one-year Treasuries. Investment-grade corporate bonds are attractive, too. The yields on 10-year Treasuries are lower, well below 4 percent, reducing their appeal.

What all this means is that the TINA acronym no longer applies: There are viable alternatives to the stock market right now.