We’ve all heard the narrative – stocks are the only game in town. Cash is burning, and Treasury yields are terrible. There is no alternative – TINA.
Does this argument hold water? Let's consider the yields on offer.
Nominal Yields
| S&P 500 (Forward P/E as Yield) | 4.5% |
|---|---|
| S&P 500 (TTM P/E as Yield) | 3.9% |
| S&P 500 (P/E 10 as Yield) | 2.7% |
| Treasuries 20YR | 2.4% |
| Treasuries 10YR | 2.1% |
| Treasuries 2YR | 1.6% |
| Cash | 0.6% |
I've used YCharts and Multpl to source the P/E values for the S&P 500. To arrive at a yield for the S&P 500, calculate the reciprocal of P/E.
Earnings Yield = 1 ÷ P/E
In terms of asset allocation, I think stocks deserve to be overweight – but the risk premium isn’t great. I think Treasuries and cash have their place right now, given their performance in bad times. Stocks should command a premium, and currently that premium is low.
My asset allocation at the time of writing is:
- Stocks 40%
- Treasuries 20%
- Cash 20%
- REITs 20%
I employ tactical asset allocation, based on the relative yields on offer. My asset allocation will change as yields change. If stocks crash and offer a better risk premium – then I will increase my allocation to stocks (and vice versa). I'm pretty close to moving 5% of Cash into Treasuries, if yields rise a little further.
REITs? In a negative real rates environment, leveraged property has a high probability of performing well. I have chosen REIT exposure in reasonably priced UK sectors that I think will stand up to a number of different risks (UK investor). Mainly domestic property and last-mile warehouses.
TLDR – I think that stocks are the main game in town, but they’re not the only game. None of the options look great. How do you allocate your assets in the current environment?
I am not a financial advisor, please make your own judgements.
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