Wall Street Concedes There Is Finally an Alternative to Stocks
TARA, TAPAS and TIARA are battling to replace TINA as traders’ favorite investing mantra
Wall Street says it is done with TINA.
For years after the 2008 financial crisis, investors held on to the belief that “there is no alternative” to stocks. Bond yields had hit rock bottom—they were even in negative territory in Japan and much of Europe. The stock market, especially in the U.S., seemed to be the best place to seek robust returns.
Then came last year’s market selloff. Stocks slumped and bond yields soared to levels not seen in more than a decade.
The moves have made many investors rethink TINA altogether. For the first time in years, things outside of the stock market—including emerging market assets, Treasurys and cash—are looking attractive, they say.
Fund managers’ allocation to stocks is sitting at about 2.2 standard deviations below its long-term average, according to a February survey conducted by Bank of America Corp. Meanwhile, fund managers have more of their portfolios than usual in bonds, emerging markets, cash and commodities, the bank said.
Goldman Sachs Group Inc. has dubbed the shift “TARA,” short for “there are reasonable alternatives,” while Deutsche Bank AG has endorsed “TAPAS,” meaning “there are plenty of alternatives,” and Insight Investment has come up with “TIARA,” or “there is a realistic alternative” to stocks.
After falling 19% in 2022, the S&P 500 has rebounded over 5% this year. The yield on the 10-year U.S. Treasury note is at 3.962% and crossed 4% last week for the first time since November.
Money managers who are trying to gauge the market’s trajectory say they will be closely watching the Labor Department’s monthly employment report on Friday to see whether job growth continued to pick up steam in February.
“For a number of years, U.S. growth stocks were kind of the only game in town,” said David Lefkowitz, head of equities Americas at UBS Global Wealth Management. “Now you can actually get a yield in fixed income.”
The firm has been advising clients to look beyond U.S. stocks and consider shifting more money to areas such as emerging market assets as well as investment-grade bonds.
To be sure, bond yields had already climbed to multiyear highs in 2022—and that didn’t stop investors from yanking money out of the bond market anyway. Investors took a record $216 billion from taxable bond funds and $119 billion from municipal bond funds last year, according to Morningstar Inc. Major bond indexes suffered their worst declines on record.
Moreover, many of the markets that investors have identified as alternatives to stocks have stumbled recently after rallying to start the year. In February, copper prices posted their biggest one-month decline since July and the MSCI Emerging Markets Index had its worst month since September.
Still, many maintain that stocks look less attractive than other assets.
Earnings, which investors consider one significant driver of stock gains, have begun to falter. Companies in the S&P 500 are projected to have suffered a 4.6% decline in profit in the fourth quarter of 2022, according to FactSet. That would mark their first drop in earnings since the third quarter of 2020. Analysts are also expecting S&P 500 earnings to decline in the first and second quarters of 2023.
U.S. stocks still don’t look cheap, though. According to FactSet, the S&P 500 is trading at about 17.5 times its next 12 months of expected earnings, above its 10-year average of 17.2.
“Multiples haven’t adjusted to the new reality,” said Gautam Khanna, co-head of U.S. multi-sector fixed income at Insight Investment. He has been favoring U.S. investment-grade bonds.
It is difficult to justify paying a premium for stocks that carry the risk of losing money when investors can lock in credit-market yields ranging from the mid- to high-single digits, Mr. Khanna added.
Stocks in the S&P 500, for instance, offer an average dividend yield of about 1.71%, according to Birinyi Associates. In comparison, a six-month U.S. Treasury bill offers a yield of 5.129%, up from close to zero at the start of 2022. And major brokerages are offering money-market funds with yields above 4%.
Some investors also say stocks look more vulnerable than other assets if the economy winds up in a recession.
Much of what helped the market bounce off its lows last year was hope that the Fed would be able to tighten monetary policy and contain inflation without pushing the economy into a painful recession. In recent weeks, however, some money managers have begun to worry that, instead of slowing down, economic activity might be accelerating again. If that makes inflation stay hot, the Fed might have to raise interest rates more than it otherwise would—potentially increasing the chances of a so-called hard landing.
Many analysts believe that stocks likely wouldn’t fare well in such a scenario.
In recessions going back the last 50 years, short-term bonds, long-term bonds and even high-yield bonds have delivered better average monthly returns than large-cap U.S. stocks, according to research by Derek Horstmeyer, a professor of finance at George Mason University’s School of Business.
It is difficult to know how well the economy will hold up. But at the moment, the risks for investors concentrated in U.S. stocks seem to skew toward the downside, Mr. Lefkowitz said.
“If there’s a really soft landing, maybe U.S. equities can go up 10% over the next year,” Mr. Lefkowitz said. “But if we do slip into a harder landing, there could easily be 20% downside.”