Make us your home page

Investors face stocks vs. bonds conundrum

Gail Marks Jarvis in the studio, Monday, September 13, 2010.  (Alex Garcia/Chicago Tribune)  ....OUTSIDE TRIBUNE CO.- NO MAGS,  NO SALES, NO INTERNET, NO TV, NEW YORK TIMES OUT, CHICAGO OUT, NO DIGITAL MANIPULATION...

Gail Marks Jarvis in the studio, Monday, September 13, 2010. (Alex Garcia/Chicago Tribune) ....OUTSIDE TRIBUNE CO.- NO MAGS, NO SALES, NO INTERNET, NO TV, NEW YORK TIMES OUT, CHICAGO OUT, NO DIGITAL MANIPULATION...

As investors enter the second half of the year, they are faced with a conundrum.

Continuing growth of the economy is on stock investors' side after lifting the Standard & Poor's 500 index 6 percent in the first half of the year and into record territory, plumping up 401(k)s and savings for college and retirement. Meanwhile, the Dow Jones Industrial Average closed above 17,000 for the first time Thursday.

But deciding whether to buy stocks now — after this year's rally, which follows a 30 percent gain last year — is less clear-cut.

Stocks are pricey, leaving some analysts skeptical that sizable gains can be had until companies grow sales and earnings more.

But bonds are no great attraction, either, given low interest rates and the expectation that rates will rise later this year.

As with everything in life, it's all about timing.

When rates start climbing, everything from U.S. Treasury bonds to corporate and high-yield bonds are likely to decline in value, inflicting losses on bond funds. Those losses could be especially sharp if the Federal Reserve raises interest rates earlier instead of later in 2015.

As investors decide whether they favor stocks or bonds, analysts generally have been leaning toward stocks.

In a recent Bank of America-Merrill Lynch survey, about two-thirds of professional investors worldwide said high-yield bonds have cost too much. Analyst Hans Mikkelsen of Merrill Lynch says the slightest scare on interest rates or the economy could cause the bonds to plunge.

But pros know stock market rallies don't last forever.

Goldman Sachs estimates the S&P will end 2014 at 1,900, or about 3 percent below Thursday's 1,985 close. By the end of 2015, Goldman estimates 2,100. By the end of 2016, 2,200.

Second thinking about stocks could cause reluctance to buy, which could prompt a 10 percent selloff, a "correction." Even if that were to happen, the general direction of the market is up as the U.S. economy grows, although not at the brisk pace imagined.

The key for the market will be whether earnings reports live up to expectations. Goldman Sachs strategist David Kostin is concerned because profit margins last peaked in 2011.

The S&P trades at about 16.7 times expected company profits. Kostin says that's above the historical average of about 13.5 times profits when interest rates are 1 to 2 percent over inflation. Periods like now.

Rather than cowering in less-risky sectors, Kostin thinks investors will do best later this year and into 2015 if they purchase "cyclical stocks," sectors that gain when the economy is strengthening, such as technology companies like Facebook; manufacturing or industrial companies such as Avery Dennison and Nucor; and companies such as Lowe's and Whirlpool that sell discretionary items to consumers.

Kostin suggests picking up stocks with sales growth and dividend yields above their peers while trading at prices below them.

Investors face stocks vs. bonds conundrum 07/03/14 [Last modified: Thursday, July 3, 2014 8:02pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Tribune News Service.

Join the discussion: Click to view comments, add yours

  1. Irish 31 brings flair, flavor to Wiregrass


    WESLEY CHAPEL — Irish 31 Pub House & Eatery opened its fifth location at The Shops at Wiregrass earlier this month.

    hillsevbiz072117: Irish 31 has opened at the Shops at Wiregrass with a warm, wood decor. Photo courtesy of Irish 31.
  2. Family fun featured at Lutz-area ice cream shop


    LUTZ — For Joe Schembri, ice cream reminds him of fun times he spent with his family as a child.

    hillsevbiz072117: Joe Schembri has opened the Ice Dreamery in Lutz. Photo courtesy of Joe Schembri.
  3. Clean Eatz offers low-cal options in South Tampa


    Inside Clean Eatz, almost everything is under 500 calories.

    Clean Eatz will offer healthy dining options in South Tampa. Photo courtesy of Clean Eatz.
  4. Salon brings a Parisian experience to Tampa


    A new salon in International Plaza, opened by French women Geraldine Jousseau and Estelle Mattingly, takes clients on a trip to Paris.

    Le Studio Paris offers a variety of salon services in International Plaza. Photo courtesy of Le Studio Paris.
  5. Ratings service Nielsen begins tracking live TV consumption on Hulu, YouTube


    TV ratings service Nielsen will begin tracking how many people watch network TV on YouTube and Hulu to gauge how many viewers broadcast networks have through streaming, the company announced Tuesday.

    Nielsen, a ratings company, is monitoring how many viewers watch live TV on Hulu and YouTube to get a better sense of overall viewership. | [AP]