The current interest rate yield on 10-year U.S. treasury bonds is about 2.6% as compared to about 4% on these same bonds in April of this year. Those worried about a double-dip back into recession have aggressively purchased the U.S. 10-year resulting in this very low rate. Comparable rates around the world are similarly low, with German 10-year at about 2.3%. Japanese 10-year bonds are yielding under 1%, but this is a special situation with years of deflation and the vast majority of such bonds purchased and held by the Japanese themselves.
Now consider stocks. A buyer of all 30 stocks in the Dow Jones Industrials Average would receive a dividend yield of 2.7%, plus any future dividend increases, plus any future growth in the price of the stocks. When comparing this to the 10-year U.S. treasury bond yield of 2.6%, a bond buyer is essentially valuing future dividend increases and future stock price growth at zero. This week we listened to a conference call by a stock mutual fund manager (who manages about $45 billion) where he indicated never in his career had he seen such a compelling case for owning stocks as compared to bonds.
It would seem that only one of these will turn out to be correct- either the case for bonds or for stocks. Investors should pay close attention to this disconnect as they determine how to allocate their portfolios.
