Stocks Are Out, Corporate Bonds Are Back In

Stocks Are Out, Corporate Bonds Are Back In
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

Investors have historically tended to prefer stocks to corporate bonds for one obvious reason: the former generates higher returns than the latter in the long term. That much is clear from the chart above, which shows the performance of S&P 500 stocks relative to S&P 500 corporate bonds.

You can clearly see that stocks have been outperforming bonds pretty consistently ever since the global financial crisis. That makes sense: extremely accommodative monetary policy has pushed investors toward riskier assets as they searched for higher returns. And the one-two punch of monetary and fiscal stimulus in the wake of the pandemic only exacerbated the trend, leading stocks to outperform bonds by their biggest margin ever.

But this hasn’t always been the case. In fact, stocks took nearly 20 years to start outperforming bonds again after the height of the tech bubble in 2000. And we might be on the cusp of a similar situation today: interest rate hikes have been pushing up corporate bond yields and making the debt more attractive, while the economic backdrop and a deterioration in investor sentiment is making stocks look very risky indeed.

So if you think we are headed into a stint where corporate bonds go back to one-upping their stock market counterparts, now could be a good time to rotate at least some of your stock exposure into corporate bonds. You can do just that by investing in the Vanguard Total Bond Market ETF (ticker: BND, expense ratio: 0.03%). Don't expect corporate bonds to necessarily post gains if investors continue to sell off stocks, but they should help limit any damage to your portfolio. And in today’s markets, that’s not too shabby…

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