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.