It’s a lousy proposition…
The U.S. government only offers 1.99% annual interest payment to anyone who wants to lend it money for 30 years.
Why would someone do that, when they already lose more than 2% in purchasing power each year to the effects of inflation? It’s a surefire way to slowly bleed your savings.
The answer is, you buy 30-year U.S. Treasurys if you’re worried you’d lose more money anywhere else…
Stocks will nosedive. Real estate will crash. Gold and silver will slip. Cryptocurrencies will crater. Collectibles will stop being collected.
And hey, maybe all that will happen.
But, as we’ll show you today, it isn’t happening now. If you’ve been betting big on bonds, you’ve been missing out on phenomenal gains elsewhere, like in stocks.
What’s more, this trend in “stocks over bonds” shows no signs of stopping.
We can see this clearly in a ratio chart…
While a normal price chart shows you how an asset is performing relative to its currency, a ratio chart shows you how one asset is performing relative to another.
Today, we’re looking at the stocks-to-bonds ratio. We’ll use the benchmark S&P 500 Index as our gauge for stocks. And we’ll use the 30-year U.S. Treasury for long-term bonds.
When the ratio rises, it means stocks are outperforming bonds. And when the ratio falls, it means bonds are outperforming stocks.
As you can see in the chart below, the ratio plunged during the sharp stock market sell-off in February and March 2020. But that decline was short-lived. The ratio has moved almost straight up since it bottomed. And it recently set a new all-time high…
The stocks-to-bonds ratio is in a clear uptrend. Investors are pouring their cash into stocks… And they’re far less interested in buying bonds with historically low yields.
Now, we’re not saying stocks will move higher every day from here on out. After their recent run, we wouldn’t be surprised by a small pullback.
And bonds will have their moments in the spotlight, of course. People do become fearful of nearly everything at times… And in those times, bondholders tend to benefit. This makes U.S. Treasurys a useful form of portfolio insurance.
The problem is, as bond prices go up, their yields go down. And that means they become less attractive to new investors. It’s a constant headwind for bonds… especially while yields are below the rate of inflation, as they are now.
Stocks, on the other hand, are pieces of businesses that can grow. Even if share prices rise, stocks don’t necessarily become less attractive. They don’t necessarily even become more expensive. (If a business grows faster than its share price, the stock gets less expensive.)
So if you’re on the fence about buying stocks today, we suggest you jump off it… onto the side of the bulls. Place new trades with smaller-than-normal position sizes, if that’s what makes you comfortable. Then add to them as they move in your favor.
Just don’t let fear distract you from the big picture…
Most of the major U.S. stock indexes are trading at or near all-time highs. And the stocks-to-bonds ratio is hitting new all-time highs, too.
As long as this ratio is in an uptrend, you want to own stocks.
Good trading,
— Ben Morris and Drew McConnell
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Source: Daily Wealth