David Kelly, chief global strategist at JP Morgan Funds, in a note Tuesday reiterated his view that investors should be overweight stocks relative to bonds. He said stocks have been cheap compared to fixed income based on forward earnings yields on the S&P 500.
“The assumptions have been that (1) economic growth would prove strong enough to provide a rising path for earnings, (2) an improving economy would eventually put upward pressure on interest rates, and (3) markets would avoid a destabilizing shock,” Kelly wrote. “Markets could, of course, be hit by some other shock, and investors should remember that fast rising markets limit rather than enhance future returns. For now, however, both facts and reasonable assumptions seem to support a continued overweight to equities over fixed income.”
Investors should continue to find equities more appealing due to relatively low yields in fixed income, according to Boost Research. “Equity dividend and cash-flow yields are not only high by historic standards, but also are high relative to bond yields,” it added. “The relative high and competitive yields offered by equity markets may continue to appeal to investors and sustain the rally further out, in spite of slowing growth expectations.”
iShares 20+ Year Treasury Bond ETF
Full disclosure: Tom Lydon’s clients own TLT.