What about bonds?

Stocks mostly declined on Friday as earnings season launched in earnest. Banks had some good news out of the box, but tech shares dragged indexes lower.

Pick your poison. My regular readers know that I have a thing for bonds. If you have been with me for long enough, you know that my partiality comes from the fact that I got my start on Wall Street serving as a Treasury Bond trader. Though that may sound boring to most of you, it has certainly served me well in my investment career. First, to be clear, it wasn't by design that I started there and ended up here. I suppose it just worked out that way... as sometimes happens in life . Anyway, even the most hardcore stock jockeys will admit that bond traders have a knack for setting the pace of all capital markets, kind of like a canary in a coalmine. Let's not get too deep into the ifs or the whys, but their foresight is most likely the result of having to watch economic news so closely. But there are some other reasons, the most basic of which, I would like to touch on briefly today.

Have you seen Treasury Bond Yields lately? When I say "seen," I mean really contemplated the levels. Stop shuffling through your half-read Wall Street Journal, I will tell you. A 2-year Treasury Note is now yielding 5.06%. Go on, look at it again. That's attractive isn't it, considering that US Treasuries are the lowest-risk instrument you can buy. What, is 2 years too long for you? No problem, a 6-month T-bill yields 5.54%. That's right, even more than the 2-year. If you are going to be busy and you are unsure about where things are going in the stock market, or the world for that matter, doesn't lending your cash to the US Government for an annualized return of 5.5% sound good? Sure, they can go up and down in value over the next 6 months, but if you hold them to maturity, you will get back your principal along with the annualized 5.5%. Do you know where stocks are going to be 6 months from now? I didn't think so. They too can go up and down, and at the end of 6 months, you get... um nothing but the same stock you bought at whatever the price the stock is at the time.

Just hold on for a second. I am not bashing stocks here, but rather simply pointing out some of the core benefits of holding bonds. What makes this conversation timely, or even worth discussing, is the fact that bonds are offering really attractive yields at the moment. Yields which can't and shouldn't be ignored. Now, this is not the first time I am bringing this topic up, but I have to say that I have been getting a lot more inquiries about bonds recently, and I have to admit that I am heartened that investors are paying attention to fixed income. Why now? The answer should be obvious, but take a look at this chart then follow me to the close.

Can you see it clearly? I would say that there has been a yield desert since The Great Recession. With yields at these levels and stock investors still licking wounds from 2022, bonds are starting to look attractive once again. A few weeks back I compared bond yields to stock earnings yields. Now, that is a bit esoteric, but if you just compare them on a more practical level, the argument doesn't change much. If you look at the dividend yield of the S&P500, it is 1.60%. That is quite a bit lower than a 12-month T-bill, which yields 5.39%. And during that next 12-month period, stocks can go down while the bonds will return your principal if you hold them to maturity. I'll bet that changes the way you look at bonds a bit. Ok, there is a slight caveat here, which I am sure that you are thinking about already. STOCKS CAN ALSO GO UP OVER THE NEXT 12 MONTHS, and we have certainly witnessed extraordinary moves in stocks over these past 20 years, so what's to say that we can get a bit of some of those in the next 12 months. Now, I am not recommending one instrument over the other, but I am suggesting that you consider ALL investments when building your portfolio... bonds, notes, and bills included.

WHAT'S HAPPENING WITH STOCKS THIS MORNING

Pfizer Inc (PFE) shares are lower by -2.51% in the premarket after it lowered its full-year EPS and Revenue guidance after it agreed to take Paxlovid doses back from the Government as demand for the drug fades. In the past month 28% of analysts have changed their targets 1 up, 7 down, 18 unchanged, and 2 dropped. Pfizer is set to announce earnings later this month. Dividend yield: 5.10%. Potential average analyst target upside: +32.9%.

DR Horton Inc (DHI) shares are higher by +2.39% in the premarket after Goldman Sachs upgraded the stock to BUY from NEUTRAL. DR Horton's forward PE of 7.59x is richer than competitors Pultegroup and KB Home which have forward PEs of 6.25x and 6.35x. Dividend yield: 0.96%. Potential average analyst target upside: +38.3%.

FRIDAY'S MARKETS

NEXT UP

-     Empire Manufacturing (Oct) may have slipped to -6 from 1.9.

-     Later this week: lots of earnings including some 10% of the S&P500, along with Retail Sales, Industrial Productions, housing numbers, Fed Beige Book, and Leading Economic Index. Download attached earnings and economic calendars for times and details.

-     Philadelphia Fed President Patrick Harker will speak today.