On the eve of the Trump administration’s forthcoming roll-out of legislation that will raise the cap on individual tax deductions, investing my money in stocks at a profit is looking like a bad idea. Realistically, I don’t expect to make much money from that dumb idea. I’m in the 24 percent bracket and considering doubling down on junk bonds to help cover my annual expense ratio.
That’s right: If I lose money, I’m more likely to lose it on bonds than on stocks. Corporate bonds tend to pay a decent return, but they’re particularly risky because they can rise in value but lose their value again in a recession. It’s just nature’s way of wringing our blood out for future use. It’s weird that, while stocks can lose a lot of value before ever bearing any fruit, bonds can barely reach a positive return, since, you know, you get paid to lend them money.
I’m not alone. Bonds have become unloved — or more appropriately, unloved since income has been harder to come by. One way to express the bond-shunning mood is to look at their performance against stocks. There’s been a nearly perfect correlation between the S&P 500 and 10-year U.S. Treasury bond yields since January 2017. So far this year, stocks are up 12 percent and Treasuries are down 3 percent. The typical bond investor is in a miserable fit.
I couldn’t say what the average investor would think of stocks, but a close look at investor sentiment makes me wonder. Instead of cutting his losses and investing in bonds, he might be better off cutting those losses on stocks and buying bonds, as we’ve seen in Europe. In the world’s most populous market, bond-selling mutual funds have all but wiped out the gains investors made when European stocks hit rock bottom around the Brexit vote and have reversed their course to become one of the best-performing stocks in the world, rising 17 percent in the first quarter of 2018.
If investors don’t put their cash to work, there’s a strong argument that the stock market will disappoint and cause us to all suffer an aggregate loss of money this year.
No one knows when this theme of perpetual market misery will cease. But we do know something. BlackRock, one of the big investment firms, recommends that bond investors hold their bond holdings in cash. Others suggest that investors remain in their bonds, calling for an extreme fixed-income-only bet to hold onto holdings of bonds and establish new positions in stocks.
Bond bears also point to European-style investing. The Economist puts it this way: “Investors’ lack of confidence is a much greater worry than anything else that can happen.”
My position? Put me in jail if you’ve got me. Sure, I’m tempted by the perfect pickup in bond yields, but the next time I remember I get a raise, that really irks me.