I have spent the last several months discussing all sorts of equity alternatives to bonds, so this doesn't bother me (click to enlarge):
As you can see, stocks (S&P 500) started in the hole, saw some sunshine, gave it up in a "flash" and now have moved to their highest YTD return yet, at 12.3% as of 12/8. Bonds (Barclays Aggregate Bond Index) jumped up in January and kept marching ahead until recently. Here is a chart (click to enlarge) of the cumulative differences on a monthly basis:
One of the two models available to subscribers at Invest By Model is the Conservative Growth/Balanced Model Portfolio. Its charge is to produce income higher than the S&P 500 and capital appreciation over time while preserving capital in unfriendly markets. Easy, right? The goal is to beat a benchmark comprised of 60% S&P 500 and 40% Barclays Aggregate Bond. I have flexibility, as I can invest in as little as 45% and as much as 75% stocks and as little as 10% or as much as 55% bonds. We have used only ETFs to cover the bond allocation. We can also take cash as high as 45%.
While I attribute most of our success this year to good stock selection, recently we have been aided by the sharp move in equities relative to bonds, as we have been near the 75% maximum on stocks since this summer and near the minimum 10% on bonds. I detailed this strategy in early July:
The current portfolio is structured the most aggressively yet. We have executed a series of trades over the past few weeks that leave us at 74% stocks (near the maximum), 10.5% bonds (near the minimum) and the remaining 15.5% in cash. My rationale is that stocks are extremely inexpensive to bonds. We have 7% exposure to regulated electric utilities, which pay dividends that yield more than 2.5% above the current yield of the broad bond market, which is extreme. In fact, our overall equity portfolio has a weighted dividend of 2.8% (compared to 2.2% for the S&P 500). Of the 17 names, 12 have increased their dividends in each of the past 5 years. The dividend growth rate over the past 5 years has been 15% compared to just 1% for the S&P 500. On top of it all, the balance sheets are superb. The overall net debt to capital for the portfolio is just 11%, with 8 of the names having more cash than debt. The average for the S&P 500 is 31%.
As we approach the 1250 S&P 500 near-term target that I have suggested over the past few months, I have begun to take some profits, reducing stock exposure to 70%. Last month, when bonds fell below 10% (due to stock appreciation), we took the exposure to 14%. At this point, I am inclined to allocate a little more towards bonds (from cash). Don't get me wrong, bonds are probably no great bargain, but they aren't the one-sided bet they were a few months ago. The 10-year Treasury yield closed yesterday at 3.25%, down from 3.84% a year ago but up from 2.38% just two months ago. Rates could rise to 4-4.25% over the next several months if we get signs of a sharply accelerating economy, but I don't expect that to be the case. If so, we should more than make up for it with the equity overweight.
Disclosure: No stocks mentioned