- Stocks haven’t been this attractive relative to bonds in over 70 years, according to a note from Bank of America published on Thursday.
- The current dividend yield of the S&P 500 is nearly triple that of the 10-year Treasury yield, which has historically been followed by stocks outperforming bonds over the next 12 months, the firm notes.
- Still, despite the relative attractiveness of stocks over bonds, the highly anticipated “Great Rotation” of investors moving from bonds into stocks has yet to occur, according to fund flows.
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Stocks haven’t been this attractive relative to bonds in over 70 years. And if history is any guide, that could signal further gains ahead for stocks, according to a Bank of America note published on Thursday.
In the current cycle, the previous three times stock yields have outpaced their 10-year Treasury counterpart, equities have outperformed bonds by 31 percentage points on average over the subsequent 12 months, according to BofA.
But the firm argues the divergence in performance between the two assets over the next year could be even greater this time around.
Since 1951 – when the ratio of S&P dividend yield over the 10-year Treasury rate was this high – stocks went on to return 19 times more than their fixed-income counterpart over the subsequent 12 months, the bank said.
Still, despite the drastic difference in S&P 500 yield and the 10-year rate, investors have not yet rotated into stocks from bonds, according to cumulative fund flows cited by the bank. That suggests the potential for further upside.
Bullish investors have pointed to ‘cash on the sidelines’ and high bond allocations as a potential catalysts for higher stock prices.
For some investors, There Is No Alternative, a term commonly known as “TINA.”
The thinking goes that since the Fed has lowered interest rates to near zero, bond investors will ditch their low yielding notes for stocks and in turn create demand for stocks.
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Bank of America is in the camp that flows out of bonds and into stocks is imminent.
“The extreme attractiveness of stocks over bonds, particularly as rates have plummeted back to near zero, can be the catalyst for the rotation into stocks, driving the market higher,” the firm said.
Despite the attractiveness of stocks over bonds, BofA remains cautious on stocks and isn’t calling for higher equity returns just yet.
The bank thinks risks of a second wave of COVID-19 in the US remains elevated.
Additionally, the bank said, “Borrowing from the future to fund today’s growth not only results in a failure to rationalize excess capacity and clear the slate for a real recovery, but also indicates that at some point, we will pay.”
The S&P 500 is down approximately 8% year-to-date.
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