Following the 2008 financial crisis, investors clung to the idea that “there is no alternative” to stocks, as bond yields bottomed out and even dipped into the negative in Japan and across Europe. But after last year’s selloff, when stocks plunged and bond yields skyrocketed, many investors are rethinking that belief, contends an article The Wall Street Journal. Investors are beginning to think outside the stock market box, to emerging markets, Treasurys, and cash.
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The shift into alternatives has been nicknamed TARA (“there are reasonable alternatives”) by Goldman Sachs, TAPAS (“there are plenty of alternatives”) by Deutsche Bank, and TIARA (“there is a realistic alternative”) by Insight Investments. Whatever analysts choose to call it, fund managers are putting more of their portfolios into bonds, emerging markets, commodities, and cash, with their current allocation to stocks clocking in around 2.2 standard deviations under its long-term average, according to a survey last month from Bank of America. So far in 2023, the S&P 500 has rallied more than 5% after plunging 19% in 2022, and the 10-year U.S. Treasury note is yielding 3.962%, even crossing above 4% in late February. Managers are also following news from the Labor Department to assess the market’s trajectory in the wake of the monthly jobs report, the article maintains.
Of course, investors still pulled $216 billion and $119 billion from taxable and municipal bond funds, respectively, last year, even after yields had risen to multiyear highs. And some of the attractive alternatives have slumped after rebounding at the beginning of the year, such as certain commodities and the MSCI Emerging Markets Index. Meanwhile, earnings—a major fuel for stock gains—are starting to stumble as S&P 500 companies forecast a 4.6% drop in 4th quarter profits as well further declines for the first half of 2023. Furthermore, U.S. stocks still aren’t inexpensive. The S&P 500 is trading at 17.5 times forward earnings, according to FactSet data. Many investors might not find it worthwhile to pay so much for stocks when there is still so much risk of taking a loss on them, especially when they can secure high yields into the high-single digits. And if the economy does descend into a recession, stocks could be more vulnerable than alternative assets. Given that a recession might only be avoided by further tightening from the Fed, that could also impact stocks negatively. “If there’s a really soft landing, maybe U.S. equities can go up 10% over the next year,” David Lefkowitz of UBS Global Wealth Management told The Journal. “But if we do slip into a harder landing, there could easily be 20% downside.”