Do you believe that a 3.20% 10-year bond yield alters Buffett’s preference for stocks over all other asset classes? Not a chance! It’s not even close that bonds compete with stocks at these or even slightly higher bond yields compared with all-time record levels of corporate earnings and cash flow. The earnings yield whips bond yields by a country mile.
So, where’s the beef? Are you really afraid of bond yields rising slightly above 3.5% in an expanding economy with nominal growth over 5% and inflation around 2.0%? Growth is good! While we will see less growth in 2019 and 2020, no recession is in slight. Inflation will stay contained too as productivity accelerates holding down unit labor costs after a sharp boost in capital spending in 2018. Corporate profits and cash flow will continue to increase too. Stop looking in the rear-view mirror at historic multiples as interest rates, even after the rise to 3.25%, are historically low. Our stock market is undervalued today!
We live in a VUCA (volatile, uncertain, complex, and ambiguous) environment. So, plan accordingly by controlling risk and maintaining excess liquidity to take advantage of volatile moves in the market. And only buy best in breed with superior managements and winning strategic long-term plans. Like Buffett, invest for the long term. It’s better to buy down than pay up. Buffett likes it a bargain. So do we!
