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Bonds vs. Stocks

July 18, 2012 – 5:17 pm

There has always been the battle for invested dollars between stocks and bonds. Bonds have traditionally weighed in as a place for stability with a tradeoff for small returns while stocks take the role of volatility with the possibility of much better returns.

The traditional view is being challenged. With returns on bonds so low and dividends on stocks on the rise the return aspect on a purely yield basis has turned tradition on its head. No longer are bond yields lower then dividend yields on many large blue chip stocks. Certainly, the volatility aspect of stocks is there but it is much less so when the focus is on big blue chip international stocks.

This change appears to have begun a process of money slowly being attracted to stocks and away from bonds. The extreme of low yields on bonds has normally conservative investors looking for returns in higher risk equities of all kinds. Should this trend continue, any correction in stock prices will attract money to stocks as investors search for higher yielding stocks. Lower stock prices, higher yields and higher returns, with the side benefit of smaller corrections- a virtuous cycle if you will.

Could this lead into the next big rally in stock prices? With high growth stocks selling at multiples less than their big slow growth blue chip brethren shouldn’t some money be attracted to them as well?

If there is one thing that is certain in the stock market it is that nothing is certain, but with outsized fearfulness about the economy and massive hiding in bonds by investors in recent years maybe it is time for a switch into stocks.

Good Trading
Steve Peasley

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