In many cases, the yield on investment grade corporate bonds is a good indicator of the debt component. So, based on basic math, when you discount future cash flows, a P/E of 18 on US large-caps with medium-term corporate rates still above 5%, the S&P 500 doesn’t look good to me. a great bargain.
Also worrisome on the investment front as we head into 2023 is the reality that stocks are no longer covered by bonds. For about 25 years, when stocks went up, bonds went up, helping to reduce the overall volatility of a classic 60/40 stock/bond portfolio. In recent quarters, however, the correlation has turned positive.
This is where I have some good news when it comes to evaluating performance today.; Although stocks and Treasuries might be positively correlated, that doesn’t mean we should rule out bonds. Think of it like this: If your stock allocation is down 20% next year, but your bond allocation is down 1%, the two are technically positively correlated, but bonds have helped you weather the stock storm. With positive real yields across the entire term structure of Treasuries, I say they continue to have a place for risk-conscious investors.
Although it has no more value than your guesses, I agree with Wall Street analysts’ somewhat gloomy view of the state of the S&P 500 at the end of 2023. However, there are still opportunities. Bonds should offer better real returns and if we see the usual earnings recovery in 2024, the next 12 months should present some very attractive long-term entry points for equity investors.
Source: Ambito
I am a 24-year-old writer and journalist who has been working in the news industry for the past two years. I write primarily about market news, so if you’re looking for insights into what’s going on in the stock market or economic indicators, you’ve come to the right place. I also dabble in writing articles on lifestyle trends and pop culture news.
