Investors have been in love with TINA on and off for fifteen years, ever since the Federal Reserve first dropped short-term interest rates to zero in the wake of the 2007-2009 financial crisis and then again in 2020 in response to COVID. TINA, an acronym for There Is No Alternative (to stocks), was repeatedly proffered by market pundits, with good reason, touting the attractiveness of equity ownership. Common stocks faced little competition for investor affection over that period. As market participants are learning, love can be a fleeting emotion, especially when it comes to an investor and her money.
The competing suitor in this case is fixed-income investments, more commonly referred to as bonds. Interest rates are currently at multi-decade highs, but actually close to long-term averages. An entire generation of investors entered adulthood believing 3% mortgages and 0% bank deposit rates were normal. They are now learning those rates were as abnormal as the 15% mortgages and 12% demand deposits their parents experienced when they were their children’s age.
Investors seeking a liquid asset that is less volatile than common stocks, produces income, and offers an opportunity to maintain their purchasing power are taking a harder look at bonds. Short and intermediate term U.S. Treasury and investment-grade corporate bonds may now offer real rates of return for the first time in years. The Federal Reserve is committed to bringing inflation back to its 2% target and if successful, bond investors might experience a more normalized result from their fixed-income holdings. If inflation averages 2.5%-3.5% over the next several years today’s bond rates could enable investors to maintain purchasing power parity, even after accounting for taxes in many circumstances.
Bonds’ current attractiveness is not to discredit common stocks, which historically have been a prudent, long-term inflation hedge and a more effective wealth generation vehicle than less volatile, lower-return assets such as cash, bank CDs and bonds. Company ownership has a place in most investors’ portfolios, especially long-term investors seeking a higher return who are able to tolerate the short-term volatility inherent in equities. Every investor must decide for themself the optimal mix between equities for growth, bonds for income and cash for liquidity. While breaking up may be hard to do, many investors are becoming less infatuated with TINA.
Samuel J. Taylor, CIMA®, AIF®, CRPC®
Wealthview Capital, LLC