The long-term benefits of holding on to stocks

STOCKS don’t fall simply because money is going into bonds.

As bond yields rise while the Fed goes on its rate hike path, conventional theory is that investors will switch out of stocks and into bonds to enjoy higher yields.

Thus, stock prices will be further hurt as investors rotate into the higher-yielding assets.

However, fund flow data strongly suggest the great rotation never happened, as bond fund inflows have been consistently positive throughout this bull market. Yieldchasing has always been more of a myth.

The stock market is typically in trouble when the yield curve inverts, this is where short-term yields are higher than their longer-tenured counterparts.

Such a scenario in Treasury yields has tended to be a precursor to economic recessions.

Nonetheless, the Federal Reserve’s gradual approach to rate increases is unlikely to invert the yield curve just yet.

Furthermore, arguing that the relatively higher stock yields are the sole reason investors bought stocks over the past several years also disregards the the stock market’s many positive fundamentals, like solid corporate earnings and revenues, a growing global economy and relatively low legislative risk. The drivers haven’t changed.

Bond yield jitters are just one of the many iteration of this year’s fears.

It is one of the attributes of most stock market corrections.

In Fisher MarketMinder’s view, the real time to be fearful is when fundamentals have demonstrably changed for the worst.

“As far as we can see, that just isn’t the case today,” it says.

Furthermore globally and over the long-term, stocks have historically beaten bonds.

Why is this so? In FisherMarketMinder’s words, they represent earnings power, dividends, technological progress, innovation, and the human drive to improve.

It is true that stocks are more volatile over the shorter term because they rank lower in the capital structure, for instance in bankruptcy. Thus equity holders are last in the compensation pecking order.

Nonetheless, because stocks are a share of ownership and earnings streams (over a diversified portfolio) rise over time, short-term risks generally translate into higher long-term returns.

Bonds are less volatile, but their upside is capped if you buy a bond and hold it to maturity, because it is just a loan with a fixed interest payment.