Last month’s Searching for Alpha detailed my thoughts on the direction of the capital markets for June. My view on the stock and bond markets–namely, that the former would drop and the latter rally–was based more on my intermediate-term outlook on the relative attractiveness of various asset classes rather than any short-term view.

The biggest risk to equities may well be the attractive return offered by bonds. A conservative, diversified portfolio of “A” and “AA” rated corporate bonds with maturities of less than 10 years will yield around 7%. This compares favorably to the S&P 500 index, which currently sports an earnings yield (earnings divided by the index price) of around 6.5%. If stocks are to outgun their capital structure counterparts, either earnings must rise or bond prices must increase enough to reduce their attractiveness.

Municipal bonds, senior secured loans, and other forms of debenture continue to be compelling investments and are an excellent diversifier in a well-rounded portfolio.

As I said in last month’s SFA, there are many sectors of the equity markets that continue to be compelling and that a large pullback is not likely, in my view. However, the recent rally in stocks seems a bit excessive, and a modest correction should not be ruled out.

The Monthly Index Report for June 2009

Index

Jun-09

QTD

YTD

Description
S&P 500 Index*

0.0%

15.2%

1.8%

Large-cap stocks
DJIA*

-0.6%

11.0%

-3.8%

Large-cap stocks
Nasdaq Comp.*

3.4%

20.0%

16.4%

Large-cap tech stocks
Russell 1000 Growth

1.1%

16.3%

11.5%

Large-cap growth stocks
Russell 1000 Value

-0.7%

16.7%

-2.9%

Large-cap value stocks
Russell 2000 Growth

3.2%

23.4%

11.4%

Small-cap growth stocks
Russell 2000 Value

-0.3%

18.0%

-5.2%

Small-cap value stocks
EAFE

-0.5%

25.8%

8.4%

Europe, Australasia & Far East Index
Lehman Aggregate

0.6%

2.2%

1.9%

U.S. Government Bonds
Lehman High Yield

2.9%

23.1%

30.4%

High Yield Corporate Bonds
Calyon Financial Barclay Index**

-1.8%

-2.9%

-4.5%

Managed Futures
3-mo. Treasury Bill***

0.0%

0.0%

0.2%

All returns are estimates as of June 30, 2009. *Return numbers do not include dividends.

** Returns are estimates as of June 29, 2009.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at ben@searchingforalpha.com.