{"id":65153,"date":"2023-09-25T09:30:04","date_gmt":"2023-09-25T13:30:04","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/higher-rates-may-be-here-for-awhile-that-doesnt-mean-stocks-and-bonds-arent-priced-to-buy\/"},"modified":"2023-09-25T09:30:07","modified_gmt":"2023-09-25T13:30:07","slug":"higher-rates-may-be-here-for-awhile-that-doesnt-mean-stocks-and-bonds-arent-priced-to-buy","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=65153","title":{"rendered":"Higher Rates May Be Here for Awhile.That Doesn\u2019t Mean Stocks and Bonds Aren\u2019t Priced to Buy."},"content":{"rendered":"
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Where have all the weirdos gone? Not two years ago in a cover story on the state of finance, I opened with a cowboy in his underpants serenading a Times Square duo in matching onesies about a holographic worm. He had been commissioned to raise interest in a particular nonfungible token. If you don\u2019t know what those are, they\u2019re unique, tradable, blockchain identifiers\u2014contrived digital scarcity, basically. If you\u2019re wondering why someone would buy such a thing, it\u2019s because a) prices for some of them were shooting higher at the time, and b) the people pitching them used cartoon ape faces and such to make them more personable. And if you\u2019re thinking that sounds crazier than cryptocoins, you get it. <\/p>\n

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I\u2019m pretty sure the cowboy is still around\u2014he\u2019s a Midtown Manhattan fixture. But I can\u2019t remember a recent mention of NFTs. <\/p>\n

Crypto still trades, of course, but its collective value has fallen from $3 trillion to a little over $1 trillion, or from roughly the money supply of the United Kingdom to that of Canada. Meme stock action isn\u2019t what it used to be. Sure, chat room traders will occasionally take a broken growth stock like
\n Carvana
\n (ticker: CVNA) for a joy ride. But they used to have more of a sense of humor, running up shares of the wrong company named Zoom, for example, or piling into a shell company linked to the former Blockbuster video rental chain.<\/p>\n

Higher interest rates have washed away much of the wackiness. Two years ago, the Federal Reserve was targeting a core interest rate of 0% to 0.25%. Now it\u2019s at 5.25% to 5.5%. Suddenly, it costs real money to convert interest-earning deposits into something speculative. Meanwhile, prices for ordinary investments are as agreeable as they\u2019ve been in years, with the possible exception of a handful of U.S. stocks. Take a look.<\/p>\n

A plain-vanilla U.S. bond index fund like the
\n Vanguard Total Bond Market
\n exchange-traded fund (BND) pays 4.7%, or a point more than the latest year-over-year reading on inflation. Policy makers this past week left rates unchanged but held open the possibility of another hike, and indicated that they expect rates to remain above prepandemic levels for years longer. Charles Schwab fixed-income strategist Kathy Jones points out that Treasury yields tend to peak before the last rate hike of the cycle. She sees now as a good time to lock in bond yields before they fall. <\/p>\n

Robert Tipp, the chief investment strategist at PGIM Fixed Income, has advice for tactical bond buyers. The middle of the yield curve appears to have priced in expectations of future rate declines more fully than the rest of the curve, he says. If interest rates don\u2019t fall, these bonds could be subject to \u201croll-ups.\u201d That\u2019s where prices gently decline as bonds age to match the higher yields that are available now on shorter issues. To reduce that roll-up potential, Tipp recommends a barbell approach focused on bonds shorter than two years and longer than 10. <\/p>\n

But less-tactical investors who simply buy a broad basket of quality bonds are likely to be happy enough with their results, says Tipp. \u201cYield is destiny,\u201d he says, meaning that starting yields are a pretty good indication of future results. Many investors have too little in bonds now, he says, either because they ditched them when yields were ultralow, and they haven\u2019t returned, or simply because stocks have sharply outperformed bonds of late. <\/p>\n

Gabriela Santos, global market strategist at J.P. Morgan Asset Management, says this is an excellent time for U.S. stock investors to shift money to overseas markets. Prices are attractive. The
\n iShares MSCI Eurozone
\n ETF (EZU) traded recently at 12 times this year\u2019s projected earnings, and the
\n iShares MSCI Japan
\n ETF (EWJ), at 16 times, versus 20 times for the
\n S&P 500
\n index of U.S. stocks. The U.S. dollar, following 14 years of strengthening, could give up ground to the euro and the yen, adding to overseas returns, says Santos. There has also been a shift in corporate behavior abroad. \u201cEurope and Japan have discovered the secret sauce of buybacks as something that not just mechanically improves earnings per share, but also something that at the end of the day is rewarded by shareholders,\u201d says Santos. <\/p>\n

Even U.S. stocks could continue shining. This past week, BofA Research predicted a further 4% gain from here for the S&P 500 by year\u2019s end. Higher yields aren\u2019t necessarily an impediment; the bank points out that from the mid-1980s to 2008, real rates were more than a point higher than now, and stocks returned 15% a year. Also, companies, unlike bonds, can always make changes.
\n Meta Platforms
\n (META) this year announced cost cuts and stock buybacks, and projections for its earnings per share have climbed from about $8 to over $13. <\/p>\n

What makes the S&P 500 relatively expensive, of course, are puffed-up valuations for seven technology companies with outsize index weightings. BofA is particularly bullish on the equal-weight version of the index, like the one underpinning the
\n Invesco S&P 500 Equal Weight
\n ETF (RSP). It recently traded below 16 times this year\u2019s projected earnings. <\/p>\n

The valuation gap between the equal-weight index and the top seven stocks in the regular S&P 500 is the widest since the late-1990s dot-com stock bubble, says BofA. Plus, the second quarter seems to have marked a trough in the current earnings cycle, and the recovery part of the cycle, which we might be in now, tends to favor the value tilt of the equal-weight index. <\/p>\n

Somewhere in there is a mix of assets that can perform for the next decade even without meme status or an underdressed cowboy crooning to raise exposure. Although, if you want to hedge, I\u2019m sure he\u2019d be willing to work up an equal-weight indexing diddy for a reasonable fee. <\/p>\n

Write to <\/strong>Jack Hough at jack.hough@barrons.com. Follow him on Twitter<\/a> and subscribe to his Barron\u2019s Streetwise podcast.<\/p>\n<\/p><\/div>\n<\/div>\n