Relative Choices

Equity markets continue to bounce higher despite domestic and global uncertainty. Impeachment resolution may have calmed nerves a bit (though Asia virus issue still is a major concern).

Photo via Getty images

Why higher? One reason equity markets have risen is that relative choices are not particularly attractive.  See the trendline for 10-year Treasury issues. Yields are still below 2%.

This low yield return means the income yield spread between treasuries and equities has narrowed. It seems that investors have decided that the bond market simply does not provide enough income as a sole investment alternative.

Still, it’s important to keep in mind that bonds are not just for income.  They provide volatility protection in times of significant equity fluctuation. For many investors fixed income still has an important role in a total allocation plan.

Equities pay dividends and provide inflation protection and this view appears to be winning the day. While they are more volatile than bonds, there often is an income stream than is helpful when looking at overall long-term returns.

The gap in yield between equities and fixed income can be a driver of returns. It is our view that the gap narrowing is driving equity prices higher.

See the chart below.  The net spreads have narrowed.

REMEMBER: equities provide capital risk. That type of risk cannot be overlooked.

We consider this and many others as we allocate your portfolio. Our ability to adjust based on conditions is a key benefit of working with DWM; we are always watching.

Any questions, please let us know. Happy to help!