Yes, there are alternatives to stocks

That’s where bonds and cash come in. They offer solid income with much less risk than stocks – at least in theory.

The effects of higher yields

Last year was not good for bonds.

At the start of the year, money market funds offered virtually no interest and bond returns ranged from mediocre to terrible depending on the month. Stocks were said to be the only game in town.

Interest rates rose as the Federal Reserve fought inflation and the bond market collapsed. As yields (interest rates) and prices move in opposite directions and yields started at lows, rising interest rates led to the biggest bond market losses of the last century. The Bloomberg US Aggregate Bond Index, a benchmark for investment-grade bonds, lost 15 percent in 2022, according to FactSet. The S&P 500 fared even worse, dropping 20 percent, although that’s little comfort if you had a lot of bonds or bond funds that you thought were safe.

Now it is a different landscape.

Bonds are more reliable than last year because yields are already high. Even if they continue to rise, there is now a soft cushion and any price declines should be offset, and then some, by the income that bonds generate. Bond funds and exchange-traded funds are also unlikely to see declines in last year’s range. “Bond math tells us it won’t happen,” Kathy Joneschief fixed income strategist at the Schwab Center for Financial Research, in an interview.

With the federal funds rate above 5 percent, rich returns spilled over to money market funds and Treasury bills with maturities of up to one year. Now that the debt ceiling battle is over and the Treasury is issuing a huge amount of new debt, we can say once again that those investments are safe. You can’t say that about tech stocks.

There are many ways to compare the valuation of the stock and bond markets.

It’s a bit shaky.

Basically, the higher the bond yields and the lower the equity income, the better the bonds stack up, and vice versa. A long-standing measure is comparing the trailing 12-month earnings yield of the S&P 500 to the yield of government bonds. Right now, bonds are doing well in this horse race.

S&P’s earnings yield is 4.34 percent, according to FactSet, making it lower and in some ways less attractive than the ultra-secure yields above 5 percent on one-year government bonds. Investment grade corporate bonds are also attractive. Yields on 10-year government bonds are lower, well below 4 percent, making them less attractive.