Yes, we know. “There Is No Alternative” has been pronounced dead several times before, but it feels a lot truer now than ever before.
As the above chart from Morgan Stanley shows, the gap between the S&P 500’s earnings yield and the returns from cash or high-grade, shorter-duration corporate bonds has narrowed significantly lately.
Given that equities are a lot choppier these days, it must be starting to get tempting to rotate back into bonds, Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, mused this weekend:
. . . For much of the last 12 years, it was common to hear some variation of ‘TINA’ (There Is No Alternative), the idea that one needed to be long stocks and bonds because cash offered so little. Low yields were not the primary reason why stocks rallied over that time; global equities and global equity earnings simply rose by the same amount (~100%). But was TINA a helpful mental crutch for markets, especially in times of stress? Absolutely.
These tighter policy rates are now scrambling that mindset. Six-month US T-bills yield about ~3.75% and, as we discussed last month, cash and short-term fixed income increasingly offer lower volatility and high yield within a cross-asset portfolio. US 1- to 5-year credit yields ~4.9% against an S&P 500 earnings yield of ~5.9%. But over the last 30 days, the S&P 500 has been 5.7 times more volatile.
In short, investors now have a number of higher-yielding, lower-volatility alternatives if they want to step back from the market. We think this helps to support USD (where yields are the highest), keeps my colleague Mike Wilson cautious on US equities and leads us to see credit outperforming equities in the US and emerging markets.
On a related note, we’re big fans of Sheets’ occasional cartoons, and his latest on the ongoing and weird divergence between consumer confidence and spending is a good one.
If you want to see more, FT Alphaville went through some of his better ones over the past decade over here.