Yahoo Finance David Rosenberg: Goodbye TINA, hello safety and income at a reasonable price
David Rosenberg and Marius Jongstra
For much of the previous economic cycle, and even in the early aftermath following the pandemic, investors repeated the phrase “there is no alternative” (TINA) as a way to justify owning United States stocks despite high and rising valuations levels. At its core, the argument makes sense: thanks to the U.S. Federal Reserve’s inability to meaningfully raise rates, the low interest rate environment forced investors further out the risk curve to get the income and price gains they desired.
Fast-forward to today, and the continued hawkish monetary policy out of the Fed and other global central banks has completely reversed this prior phenomenon. Cash is no longer trash, and investors can find alternatives for yield. Furthermore, given the rocky economic and market environment we currently find ourselves in, the good news is that many of these income plays can be found in traditionally lower-risk investments, meaning the need to move out on the “risk curve” is no longer as necessary as it once was.
TINA is out and is now replaced by SIRP: safety and income at a reasonable price.
To illustrate, prior to the onset of the global financial crisis and its ensuing low interest rate environment, the average spread between the 10-year U.S. Treasury and S&P 500 dividend yields was just shy of 400 basis points. From 2008 onwards, that dropped to a significantly smaller 50 basis points.
To be sure, despite our lack of conviction that the highly indebted global economy can handle such a significant move in interest rates and will eventually be forced back down to a lower equilibrium, the fact that the post-financial crisis movie is now going into reverse (even if temporary) is opening opportunities for those seeking yield and safety.
With this in mind, we decided to run a screen across asset classes to gauge how current yields compared to their post-financial crisis averages. The results are presented in the accompanying chart.
Unsurprisingly, U.S. equities, as represented by the S&P 500 and despite selling off 24 per cent from their highs, still only offer a yield (1.8 per cent) that is in-line with the average of the prior cycle. This is consistent with our analysis that stocks are the only major asset class where valuations did not appropriately re-rate after interest rates started rising. Beneath the surface, focusing on consistent dividend payers offers slightly better value, with the dividend aristocrats yielding 2.7 per cent.
Where things begin to get interesting is across the fixed-income space and real assets. In comparison to equities, the average yield pick-up an investor can achieve is nearly 300 basis points. Relative to their individual averages from the prior low interest rate environment, the average excess yield is nearly 200 basis points. In the current investing backdrop, where heightened volatility and challenged returns are to be expected, these are meaningful differences. Moreover, there is a considerable range of asset classes across the risk spectrum that should be able to suit investors’ individual needs.
For those looking for risk-free investments, cash is no longer trash with three-month T-bills yielding nearly four per cent (compared to the post-financial crisis average of less than one per cent); the belly of the curve yielding four per cent or more (averaged one to two per cent prior); and the long end right at four per cent (averaged two to three per cent prior).
Municipal bonds, while not entirely risk free, offer similar returns ranging from 3.6 per cent (general obligation; prior average 2.1 per cent) to 4.1 per cent (revenue bonds; average 2.6 per cent).
Taking it a step further, investors can look to corporate credit where the high-rated investment-grade bond market offers almost a six-per-cent yield (almost double the 3.3-per-cent average). If interest rate risk is a concern, even short-term investment-grade bonds yield 5.4 per cent. Valuations of high-yield bonds, despite the risks of rising defaults in the coming months, have dramatically improved — much closer to pricing in default and recessionary concerns compared to equities — and now offer a near-10-per-cent yield (prior average 6.5 per cent).
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The preferred share market now yields six per cent or more, though the value is not as great compared to the typical 5.7-per-cent yield of the last cycle. Ditto for energy master limited partnerships (pipelines) and other infrastructure assets, which possess 7.5-per-cent and four-per-cent income streams, respectively, but are not meaningfully better than the prior cycle.
We also note real estate investment trusts with their current 4.1-per-cent yield, but stress selectivity given the headwinds facing the real estate sector. Treasuries are offering a comparable payout with much less risk, so we can’t blame investors for looking past this asset class altogether at the current time.
Ultimately, what is clear from the chart is that if there is one silver lining to the Fed’s persistent rate hikes, yield is back in vogue and investors no longer need to stretch themselves in terms of risk to get the income they desire. And, with the risk-off market environment investors are facing, “there is no alternative” has given way to “safety and income at a reasonable price.”
For example, cash, Treasuries and municipal bonds yield four per cent or more; and for those wanting to dip their toes into the risk pool, they can look at more appropriately priced (compared to equities) investment-grade and high-yield bonds with their respective six-per-cent and 10-per-cent yields.
Equities in the prior decade were ingrained in investors’ minds as the only game in town. Thanks to the Fed and other central banks, this bear market has now changed that narrative completely.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Marius Jongstra is an economist there. You can sign up for a free, one-month trial on Rosenberg’s website.
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