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NDR: When bonds become superior to equities

Fed easing is a matter of timing and NDR’s historical studies show yields have always declined in the 3-months before the first rate cut. But most clients take a more holistic view, whether it be a simple 60/40 portfolio or a more complex multi-asset allocation decision.

Our preferred relative valuation metric between bonds and stocks is a forward-looking ERP. Here we compare the 1-year forward earnings yield for the S&P 500 with the 1-year forecasted Baa corporate bond yield (middle clip) and plot the difference (bottom clip). We also plot the relative total return ratio between the S&P 500 and the Bloomberg IG Corporate Bond Index (top clip). When the ratio is rising, equities are outperforming IG corporates and vice versa.

Our analysis also shows that on a fundamental basis, when bond yields exceed earnings yields by nearly 200 bps, equities are vulnerable and bonds are the better bet. In fact, the ratio falls at a 7% p/a rate - not the condition we have today. To access the full publication please fill out the form to the right, or click here to participate in our trial program.

Chart Of The Week