Rising bond yields require a rethink of stock investing, Wells Fargo says

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeInvestorRising bond yields require a rethink of stock investing, Wells Fargo saysEquity allocations are sitting at record levels next to bonds, but is the risk worth the growing returns from bonds?Author of the article:A pedestrian wearing a protective mask walks past automated teller machines (ATM) at a Wells Fargo bank branch at night in Washington, D.C., U.S., on Jan. 7, 2021. Photo by Ting Shen/BloombergFor years, U.S. stocks have faced relatively weak competition from bonds or Treasuries in investor portfolios. That period looks like it’s headed for a fast, and possibly painful, end, strategists at Wells Fargo say.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountAfter years of relentless buying, equity allocations are sitting at record levels next to bonds, thanks to double-digit earnings growth that has swamped relatively anemic coupons offered by debt instruments. Investors currently have roughly 72 per cent of their funds sitting in equities, the highest level since 1969, according to the bank’s data.This advertisement has not loaded yet, but your article continues below.That’s not a winning strategy in a stock market that now needs to contend with 10-year Treasury yields rising above five per cent. Up and down Wall Street, strategists say they expect to see less demand for stocks while rates persist at these levels.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try again“Equity allocation right now isn’t reflecting the five per cent risk-free rate world,” said Ohsung Kwon, chief equity strategist at Wells Fargo. The split between investments in equities and bonds should look more like the typical 60 per cent/40 per cent with rates at current levels, he added.The investment math, Kwon says, suggests a potential “reset.” Prior instances when stock allocations were this stretched have preceded the S&P 500’s annual profit expansion of about seven per cent. This pace of earnings growth implies a five per cent return for the S&P 500. Meanwhile, Treasuries are offering five per cent risk free. Add it all together, and the excess return for stocks over bonds is nil.“I really don’t see that many incremental buyers,” Ohsung said of stocks, adding that investors are already overexposed to the group while bonds are now offering juicy returns.This advertisement has not loaded yet, but your article continues below.A methodology that compares corporate profits to bond yields, known as the Fed model, points to a similar conclusion. The S&P 500’s earnings yield — how much profits one gets relative to share prices — is about one percentage point below the yield on 10-year Treasuries, according to data compiled by Bloomberg.There is some evidence already that investors have recently begun trimming their equity allocations. A recent fund manager survey from Bank of America Corp. showed investors are now 49 per cent net overweight stocks, down from 58 per cent at the end of August. That survey was conducted before the 10-year Treasury rose above five per cent, and the bank’s strategists say these levels will drive more bond buying.“The quickest way to end a boom is with a surge in bond yields,” said Anya Shelekhin, an investment strategist at Bank of America. She doesn’t believe yields have climbed to that point yet, but the team has recommended investors go long bonds in the fourth quarter, when she expects yields will peak.The stretched equity exposure, however, have been years in the making. For the bank’s private clients, those allocations have risen from 39 per cent in 2009 to 66.1 per cent now. That compares with 17.2 per cent in bonds and 9.4 per cent in cash — a record low for cash holdings, according to data released on Friday.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Equity holdings represent 49 per cent of total financial assets for U.S. households, a record, according to the most recent Federal Reserve data, up from 21 per cent in 2008. For context, the level stood at 41 per cent during the post-COVID rally and 37 per cent before the dot-com crash in 1999.Part of the excess positioning by investors is a function of the stock market’s prolonged bull runs, said Marta Norton, chief investment strategist at Empower. Investors have bought and held equities, which have gained in value to the point that those holdings now massively outweigh fixed income and other holdings. The current bull market for U.S. stocks will reach the four-year mark next month.“We’ve just seen such a massive outperformance of earnings relative to the norm that has, I think, covered a multitude of sins,” Norton added.Still, Norton sees the advance in Treasury yields will pose a challenge to the equity market and equity positioning in the coming months, especially earnings growth comparisons will face a tougher hurdle in the coming quarter.“I tend to think bonds are a better buy today,” she said.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.