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Stocks vs. Bonds Going Forward

If we had to venture a guess at this particular juncture as to where the stock market is headed, we would break down our guess into the near term (next several months) vs. the longer term (next year or two). In the near term, we wouldn't be surprised to see continuing advances. But looking out a little further, we particularly wouldn't be surprised to see another major substantial downdraft. Whether or not the latter materializes, we currently might project upcoming overall yearly average gains for stocks which might be somewhere in the range of 5 to 8%.

As for bonds, while we agree that they may be less risky than stocks in the next year or two and that positive returns will still prevail, the gains are likely to be significantly less than the excellent returns already achieved by some categories of bonds over the last year or so (e.g. our strongest bond fund recommendation from a year ago, PIMCO Total Return, has returned approaching 12% over the last year, thru July 31st).

Surprisingly, in spite of the tremendous stock rally since early March, data show that mutual fund investors over the period have apparently finally embraced a great deal of our long standing fondness for bonds. In fact, fund investors have been net buyers of bond funds to the tune of approximately four times the amount that they have been investing in stock funds.

Could it be that many of these newly adoring bond investors have been convinced by my Newsletter's positive slant on bonds? No, I truly doubt that could be it. But if these investors were merely inclined to be "chasing performance," why wouldn't they sucking up rocketing stocks a whole lot faster than bonds?

Perhaps one might truly say that there is a "new moderation" among fund investors and that the American public is genuinely in a more conservative (or maybe even, austere) position than they have been in many a year. While we think that greater diversification into bonds is a welcome development, and may even in itself help to keep interest rates at a pretty low level, we doubt that bonds prospects will prove to be worth a four times bigger bet than stocks going forward.


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