Bank of America
- Equities have not been as attractive as bonds for more than 70 years, according to a Bank of America note released Thursday.
- The current dividend yield on the S&P 500 is almost triple that of the 10-year Treasury, which has historically been followed by stocks outperforming bonds over the next 12 months, the firm notes.
- However, despite the relative attractiveness of stocks compared to bonds, the much-awaited “big rotation” of investors switching from bonds to stocks has not yet taken place, according to the flow of funds.
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Equities have not been as attractive as bonds for over 70 years. And if history is a guide, it could signal further gains for stocks, according to a Bank of America note posted on Thursday.
The current dividend yield of the S&P 500, around 2%, is three times that of the 10-year US Treasury, which returned 0.66% Thursday morning.
According to the BofA, stocks have outperformed bonds by an average of 31 percentage points over the current cycle, with previous stock market returns three times their 10-year Treasury counterpart.
But the firm maintains that the divergence in performance between the two assets over the next year could be even greater this time.
Since 1951 – when the ratio of the S&P dividend yield to the 10-year Treasury rate was so high – stocks have continued to generate 19 times more than their fixed income counterparts over the next 12 months, the bank said.
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However, despite the considerable difference between the return on the S&P 500 and the 10-year rate, investors have not yet opted for bond stocks, according to the cumulative cash flows cited by the bank. This suggests additional upside potential.
Bank of America
Bullish investors said “margin liquidity” and high bond allocations were potential catalysts for rising stock prices.
For some investors, there is no alternative, a term commonly known as “TINA”.
The thought is that since the Fed has lowered interest rates to almost zero, bond investors will abandon their low yield notes for stocks and in turn create demand for stocks.
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Bank of America is in the coming out of bonds and towards stocks is imminent.
“The extreme attractiveness of stocks compared to bonds, especially since rates have fallen to almost zero, can be the catalyst for the rotation of stocks, driving the market up,” said the firm.
Despite the attractiveness of equities versus bonds, BofA remains cautious on equities and is not calling for higher equity returns at this time.
The bank believes the risks of a second wave of COVID-19 in the United States remain high.
In addition, the bank said: “Borrowing in the future to finance today’s growth not only fails to rationalize excess capacity and clear the list for a real recovery, but also indicates that at some point we will pay. “
In the same note, BofA presented a bullish scenario where US stocks will rise 14% over the next year.
The S&P 500 has been down about 8% since the start of the year.
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