Are Bonds Expensive? Stocks Cheap? Both?
Author: Mark Gongloff</br></br>Bonds continue to trounce stocks, sending mixed signals to investors and raising the question: Are stocks too cheap or are bonds too expensive?</br></br>After consistently lagging behind bond performance this year, stocks appear historically cheap compared with bonds, offering investors reason to favor stocks, particularly if they are optimistic about the economic outlook. But stocks may be cheap because the outlook is dim, meaning bonds--from Treasurys to corporate debt--could continue to outperform for the foreseeable future.</br></br>So far this year, the stock market's total return is slightly negative, while normally staid investment-grade corporate bond returns are up nearly 8%, according to Bank of America Merrill Lynch indexes. Even risk-free Treasury returns are up 6%.</br></br>Stocks made up some ground with a 7.1% rally in the Dow Jones Industrial Average in July. But such stock rallies have stalled repeatedly in recent months as weak economic data have outweighed signs of hope from corporate earnings. The yield on the 10-year Treasury note has dropped below 3% as investors scramble for safe havens, and the demand for corporate bonds is booming.