Depending on which pundit sounds off on which day, we’re in a bear market, a volatile market, a market correction, a market comeback — or some sort of mystery market that not even a crystal ball and 10 university economists can crack.
You can almost hear the sigh in Angelo DeCandia’s voice when the professor of business at Touro College says, “We may have reached a point where bullish and bearish don’t mean the same thing as they used to.”
“Yes, we may be headed for a bear market — we also might be headed for a bull market,” says Kirsty Peev, portfolio manager at Halpern Financial, near the District of Columbia. “Trying to predict what the market will do is a fool’s errand because it encourages a strategy based on external events completely outside the investor’s control.”
[See: 10 of the Best Stocks to Buy for 2019.]
Be that as it may, it’s not as though Wall Street’s about to take a time out to sort it all out. That leaves everyday investors in a ponderous environment to ponder their questions, not the least of which is: What about bonds?
“Perhaps a 100 percent allocation in growth stocks is just not the best strategy any longer,” DeCandia says. “But great care should be taken when moving out of stock and into bonds, primarily for the interest-rate risk which bonds may suffer in 2019.”
That’s because U.S. Treasurys, while regarded as battleship safe, don’t respond well to rising interest rates. When the Federal Reserve’s interest rates jump, yield from Treasurys sinks. And after the Fed raised rates four times in 2018, it remains to be seen whether more of the same looms on the horizon.
“Interest rates, particularly for U.S. Treasury yields have fallen in recent weeks,” says John H. Donaldson, vice president and director of fixed income at Haverford Trust Co. in the Philadelphia area. “While the Federal Reserve is not likely to raise its rates again in the very near future, they are even less likely to cut rates.”
No matter how loudly the White House complains, the Fed will do what it sees fit — which could mean not-so-great news for government bond buyers. Russ Zalatimo, managing partner at HudsonPoint Capital in Edison, New Jersey, goes a step further: “Should rates rise, bond chaos will ensue.”
Then there’s the question of where to park your money in the first place.
“Stocks and bonds obviously compete for investors’ capital,” says Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business. “But compared to bonds in the United States, the stock market seems incredibly undervalued.”
Johnson explains this in terms of price-earning ratio: The higher that number flies, the more an investor will pay for earnings. “With a 10-year Treasury bond yield of 2.73 percent, it effectively sells at a P/E ratio of 36.6 times,” he says. “Investors pulling out of stocks, which are selling at a forward P/E of 14.9, to go into bonds with a P/E of well over double that are making a curious move in my opinion.”
“Bonds are a troubled asset class right now and we don’t see that changing in 2019,” adds Jay Pestrichelli, managing director at ZEGA Financial and based in West Palm Beach, Florida.
[See: 7 Mistakes Investors Make in a Market Downturn.]
As such, “We’re not using them as part of a diversification plan,” Pestrichelli says. “Instead, we use bonds to pay for options that protect our clients’ stock positions. Bonds are not a safe haven now — but are a smart way for investors to fund their hedging strategy in case of a downturn.”
And at the very least, bonds may quell the fears of a jittery shareholder in the wake of recent swan dives by Apple (ticker: AAPL), Facebook ( FB) and Wells Fargo & Co. ( WFC).
“Bonds are often a source of solace during stock downturns and active bond funds have done relatively well,” says Steve Azoury, owner of Azoury Financial in Troy, Michigan. “One strategy would be creating a ladder of bonds with sequential maturities. Having money come due on a regular basis eliminates the need to have a lot of money sitting in cash.”
That noted, “I don’t believe the bull market is over,” Azoury says. “The fundamentals are too good: low unemployment, solid interest and high confidence of the public. While leading a bumpy road, the stock market can still sustain growth for 2019.”
Now about that bull market thing.
“What I’m sure of is that we are in the tail end of an aging bull market,” says Michael Ciccone, associate vice president at Tradition Capital Management in Summit, New Jersey. “And it often happens that you find yourself in the midst of the bear market before you’re even sure that it’s begun.”
In Ciccone’s view, “It makes sense to seek high-quality debt from borrowers who have good cash flow and are not overly leveraged. Additionally, a diversified portfolio will lessen the impact of any potential individual defaults.” And in the event of a bear market, “asset backed securities may offer greater protection.”
“We favor bond mutual funds over individual bonds and ETFs for several reasons,” Peev says. One crucial factor is that “the vast majority of individual bonds do not trade daily like stocks do, which means that buying and selling can significantly impact the price and yield.” And from a practical standpoint, she says “bond funds are much more liquid and easy to trade when needed.”
So when the dust settles — assuming it ever does in this era of trade wars, government shutdowns and broken Brexits — it may just turn out that treating your bond investment with equal parts caution and cool-headedness applies just as much now as it did in 2018, 2017 or 1987.
[See: 8 Questions to Ask Your Financial Advisor During Volatile Markets.]
“The economy and the stock market are far too complex and unpredictable, and research has shown the ‘experts’ are correct in their predictions on average only 47 percent of the time,” says Joshua Escalante Troesh, president at Purposeful Strategic Partners in Alta Loma, California. “Attempting to predict a bear market is about as wise as poking an actual bear.”
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How Bond Investors Can Cope With a Bear Threat originally appeared on usnews.com
