For at least a decade two non-traditional factors have supported stocks—“free” money and a virtually zero interest rate environment (the latter an inevitable consequence of the former). Volumes have and will continue to be written about whether or not that much extreme and lengthy “accommodation” helped or hindered, but two (presumably) unintentional consequences of that era were that it skewed fundamental analytics (i.e., ascertaining fair valuations) and that it left almost no alternatives but stocks for the long-term saver/investor.
Some of us recall the days of things like “business cycles” where the economy and capital markets swung from “feast to famine”, from glee to glum, on a nearly predictable pattern. At the peak of those cycles, a necessary correction occurred as investors replaced some of their equity with fixed income, which would often pay 5% or better. In recent years, any moves to fixed income have been short-lived since it didn’t pay anything to speak of. Now it does, and we couldn’t be more pleased!
But the primary reason we find solace in this return to “normalcy” (assuming we are nearing the end of the free money/zero interest rate era) may surprise you. Of course, we are glad that fixed income is finally paying us for the hedging and preservative characteristics we seek. But equally important is that we believe more traditional, organic interest rates will induce fundamental factors back into the stock market. Put simply, publicly traded companies’ stock prices may again better reflect the health of those companies. Put another way, 5% fixed income yield is an acceptable alternative to stocks.
In our case, this isn’t meant to imply that we intend to replace equity allocations with fixed income allocations, since we advocate a careful balance according to individual client circumstances. What it means is that our fixed income will finally be providing the INCOME its label implies.
Any opinions are those of Steve Gideon and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation.