Analysis – Goodbye, Tina: An uncertain outlook for US stocks struggling with high yields

Louis Krauskop

NEW YORK, Sept. 29 (Reuters)The surge in interest rates is offering investors an attractive alternative to equities, complicating the situation for equities in an already bad year.

For years, investors could easily justify their preference for stocks. Because the Federal Reserve kept interest rates at historically low levels, coining the acronym “TINA” or “no alternative”, returns on other assets were meager.

The year TINA was influential was a good year for the US stock market.S&P 500 .SPX From the trough of the financial crisis in March 2009 to the end of last year, it was about 600% profitable, easily beating out many other investments.

That calculus changed dramatically as the Federal Reserve hiked interest rates to stave off the worst inflation in decades, pushing all yields higher. From government bonds to financial marketsThis is worse news for US stocks as they struggle to regain footing after a selloff that included 22% in the S&P 500. It’s going down so far this year.

“As interest rates continue to rise, there are more options for earning total returns and income in the face of equity market volatility,” said Michael Arone, chief investment strategist at State Street Global Advisors. “This will continue to put downward pressure on equities.”

Bond yields have skyrocketed this year, as have two-year US Treasury yields. US2YT=RRIt jumped above 4.3% earlier this week. From 0.73% by the end of 2021. Short-term Treasury yields have often been well below 1% over the past 15 years.

Yields on many U.S. Treasuries, which are considered virtually risk-free when held to maturity, are above the S&P 500’s dividend yield, which was recently around 1.8%, according to Refinitiv Datastream.

“The idea that there is no substitute for equities is no longer true,” said Walter Todd, chief investment officer at Greenwood Capital.

There are many signs that yields are attracting investors. State Street’s SPDR Bloomberg 1-3 Month T-Bill ETF BIL.Pmeasures an index of 1- to 3-month Treasury Bills and as of Friday had drawn in net inflows of about $9 billion so far this year, more than any other State Street ETF. increase.

Money market funds raised $30 billion in the last week, according to Refinitiv Lipper, while equity funds, taxable bond funds and tax-exempt bond funds have all net redeemed. According to Lipper, his money market fund assets stood at $4.44 trillion as of the end of August, not far from his all-time high of $4.67 trillion set in May 2020. .

Equity valuations are weakening as bond yields rise. The S&P 500 futures price-to-earnings multiple has increased from around 22x at the beginning of the year to around 16x, according to Refinitiv datastream.

“In tough times and good times, there’s been a lot of stimulus to help companies where the low interest rate environment has delivered sizable valuations,” said James Reagan, director of wealth management research at DA Davidson. rice field. Now resize it. ”

Of course, alternatives to stocks are not without risk.Bonds whose prices move inversely to yields have endured brutality in 2022, according to ICE BofA US Treasury Index .MERG0Q0 It has the worst annual performance on record.

Many investors believe bond prices are unlikely to stabilize until inflation subsides and there is evidence that the Fed’s tightening policy will reverse.

Investors sitting on cash, on the other hand, may be late to the stock market’s eventual turnaround.

Still, strong yields are likely to continue to present challenges to the stock market, investors say.

Fiduciary Trust Company has increased its recommended cash allocation for most portfolios to 12% from 2% at the beginning of the year, said Hans Olsen, chief investment officer at Fiduciary.

“You can do things like you can actually pay a reasonable amount to wait, which I think is a big deal. We will have to re-evaluate.”

Bond yields lead

Stocks and bonds since the financial crisis

(Reporting by Lewis Krauskopf, New York; Editing by Ira Iosebashvili and Josie Kao)

((lewis.krauskopf@thomsonreuters.com646-223-6082; Reuters message: @LKrauskopf))

The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc. Analysis – Goodbye, Tina: An uncertain outlook for US stocks struggling with high yields

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