The bond market has outperformed the overall stock market over the past three decades. However, with extremely low yields and the looming prospect of rising rates and higher inflation, the equities market and stock exchange traded funds have a good chance of beating out bonds over the next three decades, some say.
Most investment experts believe U.S. stocks will outperform long-term U.S. government and corporate bonds over the next 20 to 30 years, citing equities’ ability to hedge against rising inflation as a primary factor, reports Jonathan Burton for MarketWatch. [Are the Best Days Over for Bond ETFs?]
“I certainly wouldn’t get out of the stock market,” Jack Bogle, founder of Vanguard Group, said in the MarketWatch article. “The risks we face today are deeply serious, but the odds are that stocks will do better” than bonds.
Jeremy Siegel, a Wharton School finance professor, projects the best that bonds can eke out over the next couple of decades is a return of zero after inflation, or even negative returns.
“The bond outlook is extraordinarily bad,” Siegel added.
Bond prices are negatively correlated with interest rates, which are at historical lows – when rates rise, bond prices will begin to fall.
“We’re in the very mature stages of the secular bull market in bonds,” David Rosenberg, chief economist and strategist at investment firm Gluskin Sheff + Associates Inc. said. “I’m not bearish on fixed income, but when the five-year [Treasury] note is below 1%, you know the game is not over, but it’s close to being over.”
In contrast, the S&P 500 is trading under 13 times estimated 2012 earnings, or lower than its 17.5 average price-to-earnings ratio since the end of World War II.
“The equity market doesn’t have to do too well to beat the bond market,” Roger Ibbotson, a Yale University finance professor and founder of Ibbotson Associates, said.
Siegel estimates the average real returns from stocks will be between 8% to 9%. Bogle, Ibbotson and Ted Aronson, a founder of investment adviser Aronson Johnson Ortiz, project U.S stocks will rise 7% before inflation over the next few decades. Rob Arnott, chairman of asset manager Research Affiliates LLC, calculates an annualized average return of 5% over the next 10 years.
“People are expecting the markets to do their saving for them by delivering a high return. That’s just not realistic,” Arnott warned. “Ratchet down your return expectations, broaden the tool kit, and recognize that real returns are what matters.”
SPDR S&P 500 ETF (NYSEArca: SPY)
Chart source: Yahoo Finance
For more information on the broader stock market, visit our S&P 500 category.
Max Chen contributed to this article.
Full disclosure: Tom Lydon’s clients own SPY.