Bonds or Stocks?
In the last several months, investors have withdrawn from stocks.
The sell off in stocks, when combined with the firming of earnings, has reduced inflated equity valuations. For example, the S&P500 trades at a 2002 PE of 19x and a 2003 PE of 17x.
Meanwhile, in a flight to safety, investors have chased bonds until long bond yields have declined to 4.75%, five-year bonds trade at 3%, and 90 day T-Bills trade 1.7%, all post WWII lows!
Coincidentally, bond bullish sentiment has screamed up from 25% early this year to now over 70%. All fall in love with bonds!
This is a new mania again! No different than the High-Tech Internet bubble of 1999!
Investors are selling stocks at a time when no one else wants them because everyone else is also selling stocks.
Investors are buying bonds by bidding against each other as the majority attempt to find safety in bonds.
Just as buying technology stocks at prices of 50 and 100 times earnings was poor judgment in 1999, so is buying bonds at the lowest yield-levels in 50 years.
So what can you, the prudent investor, try to do?
Sell what people hold dear and buy what people are discarding!
Re-allocate back from bonds and money markets into stocks. Buy stocks with good risk-averse qualities including strong value, consistent earnings, low beta, and high dividend!