It’s been an enshrined article of faith among financial professionals: All things being equal, stocks trump bonds over the long-haul.
That was the central assertion in Wharton finance professor Jeremy Siegel’s landmark book Stocks for the Long Run published in 1994.
But what if that’s no longer true?
Stocks Still Rule?
The Wall Street Journal asked Siegal as much in an intriguing article that noted that bonds have performed better than stocks so far this century, at least as measured by Vanguard Group index mutual funds.
Nor do stocks look enticing to many investors at the moment, what with the global stock market selloff in 2016.
The iShares MSCI All Country World Index ETF (ACWI:US) is off nearly 7% on the year as of February 22 and 12% over the past year.
What’s more, money has been flowing out of stock funds and into fixed income investments during the first part of this year.
Siegal told the Wall Street Journal that he still thinks stocks will outperform bonds over the long haul.
The record declines in interest rates since the global financial crisis in 2008 has boosted the value of long-term bonds.
But going forward, stocks may regain their edge. As Siegal sees it:
“We have also had a record decline in interest rates, so long-term governments have done well. Do you think bonds are going to do well over the next 10 years? Are U.S. interest rates going to minus 1% or lower? And if so, wouldn’t holding stocks with a positive 2.3% dividend yield and a long history of increasing dividends more than inflation make infinitely more sense?”
The age-old debate about stocks versus bonds has been brought back to life by the poor relative performance of stocks since 2000.
However, that could be an anomaly, given the boost long-term bonds have received from abnormally low interest rates.
That said, in one sense this debate is pointless.