June 7, 2002 — “What have you done for me lately,” seems to sum up the views about bonds for several money managers and financial professionals.
The flip side of the bear market for stocks in recent years has been healthy gains for bonds in general. The Lehman Aggregate Bond Index, a widely followed barometer of the bond market, rose an annualized 6.3% over the three-year period 1999 through 2001, while the S&P 500 fell 1.02% annualized. Despite bonds’ recent gains, professional managers appear to be unmoved from the consensus that stocks offer the best prospects for capital appreciation over the long term.
“Bond outperformance is not sustainable — it reflects big declines in interest rates,” notes Al Kugel, senior investment strategist at Stein Roe. Rather than signaling a major change, Kugel believes fixed-income gains indicate a healthy correction following unsustainable rises in stocks. “The past two and one-half years are bringing the markets down to long-term averages,” Kugel says.
Perhaps it’s time to consider rebalancing. Hank Herrmann, chief investment officer of Waddell & Reed, thinks investors should take a closer look at bonds. In light of outsized equity gains in the 1990s bull market, Herrmann suggests that his firm’s clients reconsider their stock positions. “The public is overweighted in equities because of the equity cult of the 1990s,” Herrmann claims.
Overall returns for stocks and bonds may be fairly similar in the next few years, Herrmann projects. He thinks stocks are currently priced for 6% to 7% gains, and quality corporate bonds are pegged for gains of close to 6%.