Which are better: Stocks or bonds?

One economist says the outperformance of US equities over Treasurys won't be a lot higher in the next decade.

By MSN Money Partner Aug 20, 2013 2:58PM

CNBCMulti-colored ceramic piggy banks © Andy Roberts, OJO Images, Getty ImagesBy Rajeshni Naidu-Ghelani

 

The performance of U.S. equities has far surpassed the debt markets this year, and investors are hoping the trend will continue if recent shifts in asset allocations are any guide. But do stocks really have that much of an edge over bonds?

 

John Higgins, chief markets economist at Capital Economics doesn't seem to think so. According to him, the outperformance of U.S. equities over Treasurys won't be a lot higher in the next decade.

 

"Many [investors] expect the superior performance of equities to continue. While possible, we doubt it will be especially pronounced," Higgins said in a note on Tuesday.

 

Capital Economics expects the average annual real return from U.S. equities to be only 0.9% in the next 10 years if the U.S. Federal Reserve meets its 2% inflation target, compared to a 0.8% gain from bonds in the same period.

 

That compares to returns of over 18% from U.S. equities so far this year, while returns from 7 and 10-year Treasurys are down 6%.

 

The reason the predicted real return from equities is "barely" more than bonds is because cyclically adjusted price to earnings (P/E) ratios and earnings for listed companies are high compared to their long-run averages, Higgins said.

 

"If each (P/E and profit margins) were to revert to their mean, each would exert large drags on the total return," Higgins added.

 

Robert Aspin, head of equity investment strategy at Standard Chartered, however, said equities should continue to outperform bonds as the U.S. economy recovers and inflation rises.

 

"A 2% inflation target is fine for equities, basically equities should perform very nicely within a stable inflation rate," Aspin told CNBC. "The reason we are negative on bonds is the expectation that yields will continue to rise."

 

Aspin expects yields to rise on 10-year Treasurys by around 50 basis points over the next six months.

 

Longer-dated Treasury yields including the benchmark 10-year notes hit next two-year highs of 2.9% on Monday as investors worried about market fallout should the Fed started tapering its bond purchases next month.

 

Ben Lichtenstein, president at Tradersaudio.com, agrees the selling in the bond markets has further to go.

 

"What the market is telling you is its seeking value at this point and where that value is, is really anyone's guess," Lichtenstein said. "This type of trade could continue a lot longer and sustain itself much longer and for a longer duration than you think is even possible."

 

StanChart's Aspin expects U.S. equities to rise another 8% to 10% in the next 12 months, while bond yields could hit around 3.5% or higher in the same period.

 

"As the economy strengthens and inflation starts to pick up, we would anticipate that equities would continue to outperform bonds going forward," Aspin added.

 

More from CNBC

15Comments
Aug 20, 2013 3:27PM
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I'll take the dividend yields, which beat bonds by themselves, any day.
Aug 20, 2013 3:31PM
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The next decade??? This cluster**** economy will be doing well to make it to next year, let alone another decade.
Aug 20, 2013 3:19PM
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Perhaps the better question is which is worse, stocks or bonds?

 

I can't see treasuries nor equities moving higher.  Too much bloody cheap money chasing too few investments have risen stocks and bonds .  Sure they will have their rally days, but with interest rates moving up, it becomes a return on investment paradigm.  And stocks or bonds which move higher only dilute the realized rent.

Aug 20, 2013 4:56PM
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Until our government gets the $17,000,000,000,000 national debt, $1,000,000,000,000 annual deficit, the Federal Reserve's purchase of $1,000,000,000,000 a year in bad government paper, state and local government run-away pension programs, and tens of millions of lazy Americans on non-deserved welfare ALL under control... then our economy, our currency, our standard of living, and the American way of life are ALL at serious risk.  This giant Ponzi scheme known as the US Economy (not to mention Social Security, Medicare, Medicaid, Obozocare, government pensions, and more) is ALL coming to an end!!!
Aug 20, 2013 4:21PM
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John Higgins is Nuts, Equities will always outperform Bonds. Just another reason to ignore Economists.

Only reason to buy bonds is to park funds to buy equities.

Aug 20, 2013 4:12PM
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Bonds or stocks? It all depends on which ones you buy and when you sell them.
Aug 20, 2013 4:26PM
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Huge advantage, with stocks vs. bonds, the difference between the bid and asked price for stocks, is just a few cents, unless the stock is thinly traded. The difference between the buy and sell price on bonds, is anywhere from two to four percent. Also most stock dividends, have more favorable tax advantages. Corporate Bonds are usually taxed as ordinary income.

 

Aug 20, 2013 4:28PM
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They are on fire today.  SSI is the only thing to consider for retirement!!  Dividends is the wrong play!  Rates are rising!  ObamaCare is saving us from collapse...how long you think before they get into that fund and borrow off of it?  Oh Yeah, don't forget the FED is on vacation working on its next strategy to cover their tails.  Bernanke is tucking and running.  Who wants that job after they have destroyed the American dream of retiring and owning a home.  All these so called experts do not have a clue on when the FED starts tapering what will happen.  Looks like we all do!  Short everything you can, buy precious metals.  Get some deals on GE or the likes with a 5-6% yield along the way and wear your helmet.  We are all nimble enough to get in and out of the market, so lets see where it goes. 

Aug 21, 2013 1:52AM
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€ 1,00 € 1,00
€ 1,08 € 1,09
€ 1,17 € 1,19
€ 1,26 € 1,30
€ 1,36 € 1,41
€ 1,47 € 1,54
€ 1,59 € 1,68
€ 1,71 € 1,83
€ 1,85 € 1,99
€ 2,00 € 2,17
€ 2,16 € 2,37 =10% (Is my math correct?
Aug 21, 2013 5:59AM
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Dividend yields won't make up for any prolong Bear Market. Nor will buying Bond Funds be smart if interest rates continue to rise. Until we get under control the Massive redistribution of Wealth to the already SuperRich, things will never get better. The working Poor and Middle-class do all the Work while the SuperRich reap all the Benefits. When that happens for long periods, the Fiat Money System crashes.
Aug 21, 2013 3:04AM
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First of all, the Fed ISN'T GOING TO TAPER.  The main reason Ben Bernanke talks about tapering is that he doesn't want bond holders to sell off and drive up interest rates.  However, he has found that hinting of tapering causes stocks to sell off.  So, he has been wishy-washy to try to keep both stock holders and bond holders under control.

 

The big news, of course, is that Treasury bond holders are selling off, anyway!  Private Asian investors are tired of the low yields and endless devaluation of the dollar.

 

Because the federal government cannot make the interest payments unless the interest rates are ultra-low, the Fed is going to have to DO THE OPPOSITE OF TAPERING.  It is going to have buy resale Treasuries like crazy in vain attempt to drive interest rates back down.

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